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IRS Guidance On T&E Expenses, Reporting And Substantiation

Becoming familiar with the IRS Guide to T&E Expenses is something I recommend for all my clients and colleagues. This is an area that is often overlooked, but can have significant impact on your business. A brief familiarization with the rules can help significantly in avoiding the unintended consequences that can trigger a potential audit and/or make an existing audit work-scope increase. Here are the top areas you should be aware of when reviewing the IRS guide. 

Charging Items and Direct Payment

A top area where “better compliance” is warranted is employees and non-employees (ie generally owners) charging items directly to the entities credit card/debit card or directing a direct payment on behalf of the person (not the entity).  While there is probably nothing wrong with this, the issue becomes lack of contemporaneous documentation as to the purpose of the expense, names of attendees, etc. To learn more about documentation visit the IRS topic What Records Should I Keep

Also you should note another area of general confusion relates to per diem and use of mileage rates.  While these substantiate that the amount is deemed reasonable, they do not substantiate the business purpose.

What is Considered Income and Expenditures?

The general view of the IRS is pretty simple; a payment made to an individual (or charge on a company card, etc. by an individual) is income to the person making the charge unless it can be established not to be income.  Improperly or non-documented business expenses will generally be treated as compensation to the individual receiving the benefit of the expenditure (wages for employees, non-employee compensation for independent contractors). Private use of company cars is also an area where compliance can be challenging especially in the absence of substantiated business use. To learn more about private car use visit the IRS Topic 510

Expense Reports Best Practices

  •  Reports are completed and reviewed
  • Receipts and supporting documentation are attached as warranted on a contemporaneous basis
  • Separate sub accounts are established for the 50% limitation categories vs. the 100% categories 

Financial Statements

An additional consideration also arises in connection with the tax footnote on a CPA report (if applicable) on your financial statements. FIN 48 (mostly codified at ASC 740-10) is an official interpretation of United States accounting rules that requires businesses to analyze and disclose income tax risks. It is now effective for all entities adhering to US GAAP. A business may recognize an income tax benefit only if it is more likely than not that the benefit will be sustained. The amount of benefit recognized is based on relative probable outcomes for items that would be considered material to your financial statements taken as a whole. 

Here’s the 2014 IRS guide on T&E expenses.

To contact Scott or the PBO office, please go here http://www.probackoffice.com/contact/.

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Scott Palka
CFA CPA CMA MBA, Pro Back Office Partner/Consulting CFO
Scott holds a Master of Business Administration from the University of Denver’s Daniels School of Business, a Bachelors’ of Science, with honors, from the University of Illinois, and an Associate of Science in Chemical Technology from the College of Lake County. Scott is a Chartered Financial Analyst, a Certified Management Accountant, and a Certified Public Accountant. During his career, Scott has led financings from $1 million to $370 million, provided merger & divestiture analysis, deal structure and execution, led several major financial and operational system implementations, and put six sigma process improvements into action. Scott has 4 kids and loves spending time with his family. He is an enthusiastic cyclist who rides for both fun and charity.
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