Decoding Reimbursable Employee Expenses

We have had a lot of questions from our clients recently related to meals and mileage and reimbursing employees, so this blog post is dedicated to trying to clearly explain how this business topic works.

Any food and beverage and travel expenses including mileage that are directly related or associated with the active conduct of a trade or business are allowed to be deducted as business expenses for tax purposes to the extent that they are not lavish and extravagant.

If these expenses are covered by an “Accountable Plan” they do not have to be reported as taxable income on employees’ paychecks. An “Accountable Plan” means that employees are required to turn in receipts and fill out an expense report within a reasonable time, generally 30 days after the expense is incurred. This applies whether an employer gives an advance, pays a per diem, or reimburses employee paid expenses. If an employee gives an advance, the employee needs to return the unused portion of the advance along with the expense report and receipts. Under an “Accountable Plan”, the employer does not report the expense on the employee’s W2 as taxable income.

If per diems are used under an “Accountable Plan”, they must be equal to or less than the IRS allowable per diem or the difference must be included as taxable income to the employee. If you use per diems, let us know and we will provide you with the current rates. For meals while traveling, per diems need to be pro-rated by a consistent, reasonable method for departure and arrival days because they are less than 24 hours for business purposes.

If the employer does not have an “Accountable Plan” (i.e., does not require employees to turn in expense reports and receipts to document the reimbursement or per diem), then the advance or per diem needs to be included as taxable income on the employee’s W2 and then the employee can claim the expense on their taxes.

When recording mileage, commuting miles (miles from home to the main place of business and back) are not allowed as a business expense. If commuting miles are reimbursed, then they must be included as taxable income on the employee’s W2. The employee cannot claim the expense on their taxes.

For business meals, some meals are 50% deductible and some meals are 100% deductible. We recommend setting up two separate meals accounts on your books to note the difference, such as Meals-50% deductible and Meals-100% deductible and to record the expenses under the correct category as they occur. Most meals that are on an expense report fall under the 50% category.

The meals that are 100% deductible are:

1.    Recreational expenses primarily for employees who are not highly compensated, such as the business holiday party or the company picnic

2.    Office snacks provided to employees at the office

3.    Occasional meals provided on the employer’s premises to more than half of the employees for the convenience of the employer, meaning meals provided to employees to keep them working late or on weekends for the employer’s convenience (i.e., supper money).

4.    Meal expenses (or goods, services, and facilities) made available to the public, usually for advertising and promotional purposes such as an Open House.

5.    Meals for which the business is reimbursed for the expense

6.    Meal expenses includible in income of persons who are not employees

Meals that are 50% deductible are:

1.    Meals directly related to business meetings of employees, stockholders, agents, and directors

2.    Office meetings and partner meetings

3.    Meals with clients, customers, and vendors that will benefit the business

4.    Meals while on business travel status (this requires an overnight stay).

5.    Meals while attending a business seminar, convention, or any other form of meeting. Note: a meal during the course of a business day that does not have a business purpose (i.e., driving through McDonalds while on a day of sales calls within your normal territory) is not an allowable tax deduction.

We recommend that all employers adopt an Accountable Plan. This simply requires developing a procedure for reimbursing employees for the above expenses. We have a sample expense report that you can adapt to your business if needed.

Thanks goes out to Julie Kim from Watkins-Meegan for writing the most user friendly explanation of 50% v. 100% deductible meals that I have seen! Some of the words in this blog are hers.

How Much Accounting Do You Need?

The questions about accounting plague many business owners. How much, how often, and who should I use are the questions that we often hear. My response is, "It depends".

If you are a service business with straight time invoicing to clients for services and just a few expenses such as advertising, office supplies, website, travel, meals and entertainment, then you often can do your bookkeeping yourself. There is very little complex accounting involved for simple service professionals. You will want to hire an accountant to come in and set up a system for you and discuss what is allowable for tax purposes, but you can generally handle the bookkeeping yourself. If you are too busy to handle it or you just hate it, then I recommend hiring a bookkeeper to help you with the daily or weekly tasks.

It is beneficial to hire a good bookkeeper who can come in at a lower rate and deal with the detail and stay on top of getting your data into your system when you are operating under one of the following scenarios:
(1) your business is relatively simple but has a larger number and variety of transactions
(2) you are complex enough to warrant a purchase order system
(3) you have many clients and you need to track specific expenses or time to the various clients which leads to more complex billing.
She can also help you complete your invoicing and schedule payment of bills, freeing you up to work on the money generating activities that drive your business.

Where you start moving to the need for an accountant who has a more knowledge of accounting practices than a bookkeeper is when:
(1) you start having more fixed assets that you need to be calculating depreciation on and maintaining a fixed asset subsystem
(2) you have inventory and you need to be tracking inventory and need to understand the accounting related to that
(3) you have higher accounts receivable and need someone to be keeping an eye on that
(4)you have multiple employees so you might want an accountant with some internal control experience to set up and monitor internal controls for you so that you minimize your risk of embezzlement or theft
(5) when your transactions start getting larger and you can no longer handle the oversight yourself. Quite often you will keep your lower rate bookkeeper for the normal data entry and then use the accountant to come in to reconcile accounts, provide some of that internal control, and oversee all of the higher end functions that a bookkeeper might not be able to tackle for you.

Where do you start crossing into the outsourced CFO work? Again, it's not necessarily a function of how large you are. It's more of a function of how complex you are:
(1) you have added enough employees that you need more oversight
(2) you have multiple product lines and you need to be tracking the profitability of each and making decisions about which product lines to abandon and which to keep
(3) you have multiple locations so there is some consolidation or comparison of data
(4) you need to be doing more budgeting and forecasting
(5) you have large working capital needs and so you need someone to help you to monitor and make decisions regarding your cash flow.

Accounting is one of those functions that people don't like to pay for because they don't see an immediate payoff.  Those who have brought a bookkeeper and/or accountant into their business life will tell you that while the payoff may not be apparent right away, it will happen and having people with those skills helping will make your business easier to run and more enjoyable!

Are you too busy or are you procrastinating?

Small business owners are usually extremely busy and often overwhelmed by the amount and variety of tasks they must accomplish in a given week.  We often hear that there isn't enough time in a day/week to get everything done.  We understand this feeling as we are small business owners too! 

What we have noticed is that it is usually the unpleasant tasks that get pushed to the back and left undone.  Beth and I share a calendars on Microsoft Outlook and we schedule all time we are working at clients there as well as any meetings we will be attending.  What we don't always do is put tasks we are going to work on at the office on the calendar.  Since we work from our virtual office (our homes), we do a great deal of work there.  We have noticed that when we are not getting a job done that putting it on the calendar on a specific day, at a specific time pushes us enough to get the task completed. 

We are great believers in calendars-ours are color coded and maintained rigorously.  We schedule family events as soon as they come to our attention and as we are planning each month, we make sure we have set aside time for big projects which are upcoming. 

If you find you aren't getting essential but unpleasant tasks (bookkeeping?!) done time after time, consider putting them on the calendar for a day and time you feel the strongest.  We also have found that scheduling something fun right after the task you dislike also gives you incentive.

What techniques do you use to get all your work done?

QuickBooks and the IRS

There has been a great deal of chatter on the QuickBooks LinkedIn groups I belong to about the IRS requesting QuickBooks files.  There has also been related discussions about who owns a QuickBooks file-the company or the preparer (accountant, tax preparer, bookkeeper).  Beth and I had lunch with a tax manager at a CPA firm today and she mentioned a client going through an audit and how the IRS agent was using the QuickBooks file.  It was very interesting the hear that the agent was reviewing all the items in the Meals & Entertainment expense account and disallowing any checks which didn't have a name and business purpose in the memo area.  Those which did include those details the agent accepted without asking for the receipt.  Further evidence of the benefits of detailed bookkeeping!  It also shows how far accounting software programs have come. We recommend using description and memo fields to provide the detail about who you are meeting with and the purpose which may save yourself the time and expense of digging out a receipt should you be audited.

  Beth and I feel that our clients own their QuickBooks file even if it is located on our computers rather than theirs.  The majority expressing an opinion on LinkedIn concurred although there were some practitioners who felt that files on their computers were their property.  Although I am sure a lot of work went into creating those files, the information belongs to the company creating the data, not the company or individual creating the QuickBooks file.  The difference in opinion does indicate that when interviewing, companies should ask a potential accountant or bookkeeper who would own the file when they are interviewing candidates.