HeinSight

	1st Quarter, 2010

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about the Author

Rich has over 16 years of professional experience providing strategic planning and specialized risk management services for financial reporting, accounting and audit-related systems. Having served as Controller for two multi-billion dollar organizations, he brings a special understanding of client needs to every engagement. Rich helps clients to achieve best practices in a wide variety of areas, including enterprise risk services, internal audit, and other compliance initiatives, software optimization, risk mitigation programs, and planning for significant transactions.

Prior to joining HEIN & ASSOCIATES LLP, Rich was the founder and principal of Stratcon Partners, a professional services firm providing a wide range of financial advisory services to companies throughout Colorado. In addition to his experience as a Corporate Controller, he was a member of a financial consulting firm serving clients throughout the Rocky Mountain region. Rich holds a bachelors of science in accounting from Montana State University in Bozeman, Montana.

Rich can be reached at 303.298.9600 or rschwartzenberger@heincpa.com.

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Reimbursing Employee Travel and Entertainment Expenses

By Rich Schwartzenberger, Senior Business Advisory Services Manager

If you reimburse all or part of your employees' travel and entertainment expenses (T&E), how you reimburse your employees determines the way your company and your employees must treat these reimbursements for income-tax purposes. Reimbursements made to employees under an accountable plan are not subject to payroll or income-tax withholding, but reimbursements paid under non-accountable plans are reported as pay.

Accountable Plans
An accountable plan is one that pays for business-related out-of-town lodging and meal expenses and business entertainment expenses on a dollar-for-dollar basis. Payments to employees can be made through advances, direct reimbursements, charges to a company charge card, or direct billings to your company.

To be considered an accountable plan by the IRS, your reimbursement plan must contain each of the following elements:

Reimbursed expenses must have a clear business connection -- they must have been incurred by your employees while performing services on your behalf.

Your employees must adequately account for their expenses within a reasonable period of time (see the definition below). That means they are required to submit documentary evidence of their travel, mileage, and other employee business expenses, along with a statement of expense, an account book, a diary or a similar record in which expenses are entered. The employee must give you the same type of records and supporting information that they would have to give to the IRS if the IRS questioned an employee business expense deduction on the return of an employee whose employer doesn't have an accountable plan. For business travel, that means a written record of the departure and return dates, trip destination, trip purpose, and amount spent on travel expenses. Receipts must be kept for all lodging and other expenses of $75 or more.

Employees must return any excess payments (if a cash advance has been made) within a reasonable period of time. An excess payment is any amount paid to an employee that exceeds the expenses accounted for by the employee.

Employees can also be given a flat per diem or daily rate for out-of-town travel no matter what the employee actually spends for lodging, meals, and incidental expenses. If the per-diem allowance does not exceed government-approved rates, employee record-keeping requirements are minimal. Employees just have to submit a written report or statement indicating when and where T&E expenses were incurred, but need not submit bills and receipts.

What Is a "Reasonable Period" of Time?
The definition of reasonable period of time can vary based on your individual circumstances, but actions that take place within the times specified below will be treated as taking place within a reasonable period.

-- Employees receive an advance within 30 days of the time they have an expense.
-- Employees adequately account for their expenses within 60 days after they were paid or incurred.
-- Employees are required to return any excess reimbursement within 120 days after the expense
was paid or incurred.

Tax Implications of an Accountable Plan
If your company has an accountable plan, you do not have to include any T&E reimbursements on your employees’ W-2 forms, and your employees do not have any IRS reporting requirements because their expenses and reimbursements are equal. You can deduct 50% of employee business entertainment expenses, 50% of employee reimbursements for meals while in travel status, and 100% of all other reasonable employee travel expenses.

Non-Accountable Plans
A non-accountable plan is a reimbursement or expense arrangement that does not meet one or more of the rules listed above for accountable plans. If your company does not have an accountable plan, you combine the amount of any reimbursement or other expense allowance paid to your employees under a non-accountable plan with employee wages, salary, or other pay. You report the total in box 1 of Form W-2. Employees must complete Form 2106 or 2106-EZ and itemize their deductions in order to deduct their expenses for travel, transportation, meals, or entertainment. Employee meal and entertainment expenses are subject to a 50% deduction limit. In addition, total expenses are subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions. Use of a non-accountable plan, thus, essentially shifts the paperwork burden to the employee, as well as causing an increase in the employee’s reportable gross income.