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Allowances, Reimbursed Travel Expenses, Use of Credit Cards: No Written Policy and Left Unattended is Risky Business.

Allowances, Reimbursed Travel Expenses, Use of Credit Cards: No Written Policy and Left Unattended is Risky Business

Allowances, Reimbursed Travel Expenses, Use of Credit Cards: No Written Policy and Left Unattended is Risky Business

Exposure to tax consequences and employee abuse are more likely to happen to an organization with informal policies and little or no oversight for allowances, travel reimbursements and use of the organization’s credit cards.  To control costs, to minimize tax exposure, and to prevent opportunities for abuse, an organization should develop and maintain clear written policies that comply with federal and state tax laws, as applicable.  

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Allowances

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:

  1. Expense must have a business purpose (i.e., incurred while performing services as an employee).
  2. 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).
  3. 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:

  1. Per diems are ordinary and necessary for conducting business, 
  2. Per diem rates do not exceed published federal rates, and
  3. 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:

Allowance Type

Eligible Employees 

Amount

Purpose

Accountable Plan

Report on Form W-2 

 Automobile

Traveling Sales Staff

 $500 per month

Cover monthly auto lease payment and operating costs, including gasoline, registration, insurance, repairs and maintenance

 No

 Yes

Meal Per Diem

 All Employees

IRS Standard Meal Allowance (IRS Publication 1542)

 Cover daily meals and incidental expenses in connection with overnight business travel

 Yes

 No

 Cell Phone

 Traveling Employees

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

 Yes

 No

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.

Resources Available

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.

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