Executive’s Guide to IRS Travel and Business Expense Rules

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Executive’s Guide to IRS Travel and Business Expense Rules




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Presentations text content in Executive’s Guide to IRS Travel and Business Expense Rules

Slide1

Executive’s Guide to IRS Travel and Business Expense Rules

August 2012

Slide2

Overview

Audit findings and risks

IRS “Accountable Plan” rules

Risk of an IRS AuditExecutive Card UseTravel Expense RulesTaxable PaymentsBusiness Expense RulesClub Membership RulesSummary

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Slide3

Internal Audit & Tax Office Findings

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Internal Audits has reviewed Executive Card and travel expenses - findings included:

Documentation of expenses was sometimes inadequateReimbursements were not appropriately authorized

Expense reporting methods were not consistent

Tax Office has reviewed the Travel Policies and Procedures – findings included:

Clarification needed for the IRS Accountable Plan Rules

IRS exception needs to be identified for foreign travel

Explanation needed for Executive Card paid centrally

Slide4

IRS “Accountable Plan” Rules

In order for an employee to receive non-taxable (tax-free) reimbursement the following rules must apply:

Each expense must have a business purpose and be adequately documented

Original receipts for expense items over $75Spousal/family travel and/or meals are not business expensesExpenses must be substantiated within a reasonable period – travel expenses must be in SAP Trip 90 days from the end of the trip

or for non-travel business expenses, 90 days from the date paid

For travel advances, any excess must be repaid within 14 days from the

end of the trip

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Slide5

Risk of an IRS Audit

IRS is targeting University compensation including business expenses of officers and key employees

Last 18 months IRS has become more aggressive than the last 6 years combined

Audits at University of California, Princeton and othersPossible outcomes of an IRS auditUndocumented or inadequately documented reimbursements would be considered an “automatic” excess benefit

Full amount reimbursed would have to be repaid by the individual

Penalties would be assessed at 25% to the individual

All

travel and business expenses could be disqualified

The University would be charged for employer FICA tax on

all

travel and business expenses for the period under audit (Employer’s share of FICA on $60M of travel and business expense reimbursements would be almost $5M)

Reimbursements would become

taxable income to all employees who were reimbursed for travel or business expensesA settlement with the IRS could be reached requiring payment to the IRS.

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Slide6

Executive Card

Under IRS rules, the Executive Card which is paid centrally by the University is considered an

advance

.All expenses must be adequately documented and accounted for within 90 days from the end date of the trip or from the date of the expense for business expenses not related to travel.Travel expenses paid on the Executive Card are to be reported in SAP Trip as “prepaid” within 90 days from the end date of the trip

Personal expenses on an Executive Card should be repaid to the University within 30 days

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Slide7

Travel Expense Rules

SAP Trip is the “official record” for all travel expenses; its features support the Accountable Plan rule requirements

All

business expenses for the trip must be included in SAP TripPrepaid expenses in SAP Trip include:Business expenses reimbursed in advanceBusiness expenses paid directly to a vendor (e.g. travel agency bills the University for airfare)

Business expenses paid using the Executive Card

After 90 days from the end of the trip, all business expenses for the trip would be reported as prepaid – the reimbursement cannot be paid through Accounts Payable after 90 days, see Taxable Payments slides

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Slide8

Domestic versus International Travel

Domestic

All business expenses can be reimbursed tax-free with proper documentation if substantiated within 90 days from the end of the trip

International – special ruleAll business expenses can be reimbursed tax-free with proper documentation as long as this IRS exception appliesVacation was not a major consideration for the trip

If this exception does not apply contact the University Tax Office

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Slide9

Taxable Payments Defined

These expenses are taxable if paid to (or on behalf of) the employee:

Expense reimbursements 90 days after the

end of the trip or 90 days from the date paid for non-travel business expensesSpousal/family travel expenses and/or mealsNon-business expense paid on an Executive Card that has not been reimbursed within 30 days from the date of the purchase

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Slide10

Business Expense Rules

Types of business expenses other than travel

Business Meals (not related to business travel)

Entertainment with a business purposeClub memberships (requires documentation of all use)Documentation of each business expense must include:Date and amount

Location of the activity

Business purpose

Names of those who attended, and

Business relationship of each person named

Overnight travel should be submitted separately from local travel, fully

costed

with all expenses for

the trip

Local travel, such as mileage and parking, should be submitted monthly10

Slide11

Club Memberships Rules

Annual fee for clubs

IRS Rule: Must be

allocated between business and personal based on actual usageNon-business portion is taxable income if paid by JHUAnnual membership fees paid by JHU will be treated as taxable income (with a gross up for taxes if approved)Use of club for meals and/or entertainment for business purposes – follow the documentation rules for

each

activity

Date and amount

Location of the activity

Business purpose

Names of those who attended, and

Business relationship of each person named

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Slide12

Summary of Key Points

One-up approval with expenses summary template

Timely substantiation of the business purpose with adequate documentation of expenses

Full reporting of all travel expenses in SAP Trip including all “prepaid” expensesCheck box required for foreign travel to identify the IRS exception that applies to the tripProper handling of personal expenses as taxable income if paid by the UniversityAnnual membership fees paid by JHU will be treated as taxable income

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