Travel and entertainment expenses often have the potential to blur the line between business and personal expenditures and therefore represent keen areas of interest for the IRS.
The IRS gives organizations the option of running an accountable or a non-accountable expense plan. Non-accountable plans are rarely used because they require employees to include an itemized list of their travel expenses with their personal taxes to avoid having their expense reimbursements treated as income as well as to pay tax on 50% of the cost of most business meals. Travel and entertainment expenses under an accountable plan may be reimbursed on a per diem basis or on the basis of actual expenses. With the exception of government agencies and contractors, the per diem method is used infrequently because employers must set their reimbursement amounts at or below rates defined by the General Services Administration or force their employees to pay income tax on the difference.
Reimbursements made under accountable plan on the basis of actual expenses are not reported as income to the employee but require thorough documentation and detailed recordkeeping by the employer. Fortunately, the IRS accepts digital copies of expense reports and cloud and mobile technology is making the process of creating a report easier than ever:
The IRS requires a receipt for all lodging expenses and any other expense that is greater than $75. Business travelers can use a mobile app to take an image of each receipt and add it to their expense report rather than carrying the receipt with them until they return to the office.
Business travelers submitting a reimbursement for a mileage expense incurred while traveling in their own vehicle must record the destination and number of miles driven for their trip. A mobile app using a phone’s GPS can automatically determine the addresses, calculate the number of miles driven, compute the reimbursement, and add the record to the employee’s expense report.
The IRS generally requires a written description of the business purpose for each expense and does not make an exception for those of trivial size. A cloud based expense tool can allow business travelers to describe a single business purpose for a trip and automatically associate all of the relevant transactions on their credit card with the purpose statement.
No one likes to do expense reports and employees frequently forget to include receipts or document the purpose of each expense in their haste to move on to more interesting work. A cloud based expense system uses audit rules to alert employees and their managers when necessary elements of the expense report have been omitted.
IRS audits can generally go back three years and can look at six years of historical records in exceptional circumstances. Expense reports that are stored in the cloud don’t get lost, thrown away, or buried in an overflowing filing cabinet and are always ready for inspection at a moment’s notice.