Details for authorized allowances, eligibility, periodic amount, and purpose are important considerations to include in an organization’s policy. Also important, an organization needs to determine whether each allowance falls under the IRS rules for an accountable plan (an arrangement not subject to employment taxes) or if an allowance should be treated as taxable compensation and reported on an employee’s Form W-2. Expenses that qualify under an accountable plan must meet IRS rules:
- Expense must have a business purpose (i.e., incurred while performing services as an employee).
- Expense must be accounted for within a reasonable period of time (i.e., documentation maintained for who, what, where, why and when, along with original receipts).
- Any excess reimbursement or allowance must be returned to the organization within a reasonable period of time.
Use of IRS per diem amounts (alternative to actual cost method) for lodging, meals, and incidental expenses (or meals and incidental expenses only) will satisfy the IRS rules for an accountable plan if:
- Per diems are ordinary and necessary for conducting business,
- Per diem rates do not exceed published federal rates, and
- Details of per diems paid are documented and accounted for within a reasonable period of time (documentation should include date, place and business purpose for travel).
The following table may be useful for organizing your thoughts when putting together an allowance policy:
Report on Form W-2
Traveling Sales Staff
$500 per month
Cover monthly auto lease payment and operating costs, including gasoline, registration, insurance, repairs and maintenance
Meal Per Diem
IRS Standard Meal Allowance (IRS Publication 1542)
Cover daily meals and incidental expenses in connection with overnight business travel
Based on actual cost, not to exceed $40 per month
Cover basic monthly phone service, which is necessary to conduct business outside of home office
Reimbursed Travel Expenses and Use of Credit Cards
To prevent misunderstandings and potential abuse, written policies for reimbursed travel and use of company credit cards should be developed to establish procedures and controls over expenditures that are not covered by allowances.
A travel reimbursement policy should specify:
- Who is eligible for reimbursed travel expenses
- Types of covered travel expenses and specific examples not covered (i.e., already covered by an allowance or expenses incurred by a spouse)
- Type of documentation required to be reimbursed (i.e., expense voucher with explanation of travel [who, what, when, where and why], along with supporting documents such as airfare receipt, boarding pass, detailed hotel receipt, cab/car rental receipt, parking receipts, receipts for meals)
- Procedures for approval of travel expense claims
- Expenses requiring advance approval
A credit card policy should establish:
- Authorized users and safeguards for cards assigned to multiple users
- Types of authorized uses (i.e., travel expenses, business meals while traveling out of town)
- Prohibited uses (i.e., cash withdrawals, purchases for personal use)
- Detailed documentation required (i.e., original receipts and same required documents specified above for travel expenses)
Approval, Maintenance and Monitoring
Approval of written policies should be documented in the governing body’s meeting minutes. Periodically, the written policies should be reviewed and updated for clarifications, new or discontinued practices, or to comply with changes to federal or state regulations.
IRS Publications located at: http://www.irs.gov/app/picklist/list/publicationsNoticesPdf.html
- 463 Travel, Entertainment, Gift, and Car Expenses
- 1542 Per Diem Rates (For Travel Within the Continental United States)
U.S. Department of Labor OLMS Compliance Tips located at: http://www.dol.gov/olms/regs/compliance/compltips.htm
- Authorization and Documentation of Expenditures
- Reimbursed Travel Expense Payments
- Union Credit Card Policy
Safeguarding the organization’s assets is serious business for those that govern an organization. Following best practices for implementing and monitoring written policies for allowances, reimbursed travel expenses, and use of credit cards will help discourage employee abuse and minimize exposure to unwanted and costly tax consequences for the organization.
Michelle L. McCann, CPA, is a partner in Lindquist LLP's San Ramon office. She is primarily responsible for overseeing quality control for preparation of exempt organization and employee benefit plan returns, including Forms 5500, 990, LM-2 and 199. Michelle also provides QuickBooks training and support for the firm's clients.