Common expenses taken as deductions for businesses are travel, mileage reimbursement, and de minimis office expenses. These have been areas of IRS scrutiny and have strict documentation guidelines that need to be followed for the deductions to be allowed. When your business has significant expenses related to the ordinary and necessary conduct of business operations, the tax consequences can be significant when the expenses are disallowed under an IRS audit.
There are varying rules and tax consequences regarding the deductibility of de minimis office expenses, travel, and vehicle/mileage reimbursement expenses, but one thing is constant: proper documentation is critical for deducting expenses. Keeping receipts, canceled checks, bills, or other like kind documentation of expense is the first step in creating proper documentation for the expenses. If mileage is being reimbursed, a mileage log that includes the date of travel, mileage, the destination of travel, the business purpose of the trip, and other supporting information should be kept as support for the expense. For de minimis office expenses, business purchases of tangible property that are below the $2,500 threshold, you will only need to keep record of the business usage if the property is kept at a location other than the company’s place of business (such as a home office). If the property is kept at the company, all use is assumed to be for business purposes.
If travel is a frequent part of the business operations, timely record keeping is considered more reliable than re-creating mileage logs after the fact. There are various mobile phone applications that can be used to track mileage, allowing annotation on the trip to be undertaken promptly. When purchasing travel expense such as hotels, car rentals, or flights, it is best practice to use a company credit card as travel is often looked at for personal travel expenses. Keeping copies of the reason of travel such as a business conference or meeting along with notation of business purpose will aid in properly documenting the expense. One thing to keep in the fore front is the requirement to track the business purpose of any expense. Too often, business expenses appear to be personal in nature and are disallowed without proper documentation. When it comes to proper documentation, there is no such thing as too much proof if the IRS has any doubt regarding the business purpose.
If the company is reimbursing employees, requiring monthly expense reports with the proper documentation is best practice and each report should be kept with the correlated expenses. Having an Accountable Plan that is in compliance with the IRS guidelines as part of the company policies and procedures will allow for the expenses to be deducted by the company without being considered taxable income to the employee. Any reimbursements deemed to be paid without an Accountable Plan are required to be reported on the employee’s W-2 and are taxed on by the employee’s personal return.
Aspects the Accountable Plan needs to include in order to pass IRS scrutiny include:
1) The expense(s) must have a business purpose and were incurred while an employee was performing services in the ordinary course of business for the company; 2) The employee must adequately account to the company by providing detailed information on the expense(s) including the date, time, place, amount of the expense, and the business purpose; 3) Any excess reimbursements paid to an employee must be returned to the company within a reasonable and specified period of time.
Please contact us for more information on the deductibility, how to properly document expenses, and Accountable Plans.