If
you require employees to substantiate travel or entertainment expenses that are
bona-fide business deductions, partial or complete advances or reimbursements
are not treated as compensation income to the employee, and the advance or
reimbursement is not subject to social security taxes or to income tax withholding.
However, only 50 percent of any business-related meal or entertainment expense
is deductible by the company, including costs of meals consumed by employees
while they are traveling.
To
ensure that the reimbursement is not subject to payroll and withholding taxes,
the business must maintain a fairly detailed recordkeeping system. For travel,
employees must submit a written statement of the time, place, destination and
business purpose of the trip and the amount of expenses incurred by category (e.g.,
travel, meals, lodging). For meals or entertainment, the employee must submit a
written statement showing time, place and cost of the event, who was
entertained, and the business purpose of the meal or entertainment (if the
event follows or precedes a business discussion, additional recordkeeping is
required). Finally, the employee must keep and turn in to the employer
documentary evidence such as receipts for all lodging expenses, and for other
travel and entertainment expenses over $75.
Because
the recordkeeping can be onerous, the law provides some shortcuts, depending on
the type and frequency of the travel and entertainment expenses. For example,
the paperwork burden and the cost of travel expenses can be decreased by giving
employees who travel for business purposes a flat daily allowance, a per diem,
which varies by destination, to cover meals, lodging and incidental expenses.
If the daily allowances do not exceed IRS-determined maximums, they are payroll
and income tax free with a minimum of paperwork; all that is required is a
record of the time, place and business purpose of the travel. To-the-penny
accounting of expenses and corroborating receipts is not necessary.
One
simple way to cut out paperwork while boosting company tax deductions is to give
employees a flat allowance for anticipated travel and entertainment, and not
require these expenses to be substantiated. The allowance is fully deductible
as compensation (assuming the employees' compensation packages are reasonable),
and there is minimal paperwork required. The allowance, however, is subject to
payroll and income tax withholding, and the company may not be able to
determine what their actual travel and entertainment expenses are for budgeting
purposes. In addition, there are unfavorable tax consequences for the employee,
even if the travel and entertainment expenses are deducted on their own
returns.
Travel
and entertainment expenses are particularly susceptible to challenge by the
IRS. However, in some instances, businesses may fail to deduct qualifying
travel and entertainment expenses, or may be deducting these expenses
improperly. We can perform a confidential review of your company's travel and
entertainment expenses to ensure compliance with the complex rules that govern
these deductions. Please call us to arrange an appointment at your earliest
convenience.
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