Becoming familiar with the IRS Guide to T&E Expenses is something I recommend for all my clients and colleagues. This is an area that is often overlooked, but can have significant impact on your business. A brief familiarization with the rules can help significantly in avoiding the unintended consequences that can trigger a potential audit and/or make an existing audit work-scope increase. Here are the top areas you should be aware of when reviewing the IRS guide.
A top area where “better compliance” is warranted is employees and non-employees (ie generally owners) charging items directly to the entities credit card/debit card or directing a direct payment on behalf of the person (not the entity). While there is probably nothing wrong with this, the issue becomes lack of contemporaneous documentation as to the purpose of the expense, names of attendees, etc. To learn more about documentation visit the IRS topic What Records Should I Keep.
Also you should note another area of general confusion relates to per diem and use of mileage rates. While these substantiate that the amount is deemed reasonable, they do not substantiate the business purpose.
The general view of the IRS is pretty simple; a payment made to an individual (or charge on a company card, etc. by an individual) is income to the person making the charge unless it can be established not to be income. Improperly or non-documented business expenses will generally be treated as compensation to the individual receiving the benefit of the expenditure (wages for employees, non-employee compensation for independent contractors). Private use of company cars is also an area where compliance can be challenging especially in the absence of substantiated business use. To learn more about private car use visit the IRS Topic 510.
An additional consideration also arises in connection with the tax footnote on a CPA report (if applicable) on your financial statements. FIN 48 (mostly codified at ASC 740-10) is an official interpretation of United States accounting rules that requires businesses to analyze and disclose income tax risks. It is now effective for all entities adhering to US GAAP. A business may recognize an income tax benefit only if it is more likely than not that the benefit will be sustained. The amount of benefit recognized is based on relative probable outcomes for items that would be considered material to your financial statements taken as a whole.
Here’s the 2014 IRS guide on T&E expenses.
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