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  1. Home
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  3. Recordkeeping for Reimbursements and Meals & Entertainment

Recordkeeping for Reimbursements and Meals & Entertainment

Posted by Margaret Amsden on June 28, 2016

Margaret Amsden Margaret Amsden

During the ordinary course of business, the practice of reimbursing employees for expenses, as well as deducting expenditures related to meals and entertainment, is common. A clear understanding of the rules will improve your ability to defend your expenses should they come into question with the Internal Revenue Service (“IRS”).

What Are the Rules?

Internal Revenue Code (“IRC”) §162 allows expenses to be deducted that are:

  • “Ordinary and necessary” in running a trade or business, and
  • “Directly related to” or “associated with” the trade or business.

IRC §274 requires recording “at or near the time” of the expense in order to be deemed timely; IRC §274(d) disallows the deduction of expenses that are not properly documented; and IRC §274(n)(1) caps the amount of the deduction to 50 percent of expenses.

What Does the IRS Consider Adequate Records?

Records need to address the following criteria to be acceptable:

  • Amount and description of each expense
  • Time and location of the entertainment and/or meal
  • Business intent and the expected benefit from the business expense
  • Description summarizing the topics discussed
  • Disclosure of the business relationship to the person or people entertained

Examples of proper documentation include:

  • Receipts
  • Cancelled checks
  • Invoices

Who Maintains the Records?

Depending on the type of arrangement, the burden of recordkeeping will rest on the employee or the employer.

There are two types of arrangements:

Accountable Plans

  • Employer expected to keep records
  • Contain the following characteristics:
    • Business Connection – expenses made on behalf of employer for employer benefit
    • Substantiation – follows documentation requirements
    • Returning Excess Amounts – employees return per diem not spent on business activities
  • Non-accountable Plans
    • Any plan not meeting the criteria of an accountable plan
    • Employer treats advances or reimbursements as compensation on Form W-2
    • Employer withholds portion of the compensation for payroll purposes
    • Burden shifts to employee to prove the deductibility and the deduction is subject to the two percent adjusted gross income floor

Proper documentation provides the best defense to substantiating deductions to IRS. Failure to adhere can result in disallowed expense deductions as well as penalty assessments from the IRS. Please contact us for assistance in determining the deductibility of expenses or consultation to improve your recordkeeping policies.

Our team is always ready to help.

Please contact us for more information.

Margaret Amsden

Margaret Amsden

Shareholder, Private Client Services

Contact Margaret   |   Read Margaret's bio

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Recordkeeping for Reimbursements and Meals & Entertainment

Posted by Margaret Amsden on June 28, 2016

Margaret Amsden

During the ordinary course of business, the practice of reimbursing employees for expenses, as well as deducting expenditures related to meals and entertainment, is common. A clear understanding of the rules will improve your ability to defend your expenses should they come into question with the Internal Revenue Service (“IRS”).

What Are the Rules?

Internal Revenue Code (“IRC”) §162 allows expenses to be deducted that are:

  • “Ordinary and necessary” in running a trade or business, and
  • “Directly related to” or “associated with” the trade or business.

IRC §274 requires recording “at or near the time” of the expense in order to be deemed timely; IRC §274(d) disallows the deduction of expenses that are not properly documented; and IRC §274(n)(1) caps the amount of the deduction to 50 percent of expenses.

What Does the IRS Consider Adequate Records?

Records need to address the following criteria to be acceptable:

  • Amount and description of each expense
  • Time and location of the entertainment and/or meal
  • Business intent and the expected benefit from the business expense
  • Description summarizing the topics discussed
  • Disclosure of the business relationship to the person or people entertained

Examples of proper documentation include:

  • Receipts
  • Cancelled checks
  • Invoices

Who Maintains the Records?

Depending on the type of arrangement, the burden of recordkeeping will rest on the employee or the employer.

There are two types of arrangements:

Accountable Plans

  • Employer expected to keep records
  • Contain the following characteristics:
    • Business Connection – expenses made on behalf of employer for employer benefit
    • Substantiation – follows documentation requirements
    • Returning Excess Amounts – employees return per diem not spent on business activities
  • Non-accountable Plans
    • Any plan not meeting the criteria of an accountable plan
    • Employer treats advances or reimbursements as compensation on Form W-2
    • Employer withholds portion of the compensation for payroll purposes
    • Burden shifts to employee to prove the deductibility and the deduction is subject to the two percent adjusted gross income floor

Proper documentation provides the best defense to substantiating deductions to IRS. Failure to adhere can result in disallowed expense deductions as well as penalty assessments from the IRS. Please contact us for assistance in determining the deductibility of expenses or consultation to improve your recordkeeping policies.

Our team is always ready to help.

Please contact us for more information.

Margaret Amsden

Shareholder, Private Client Services

Contact Margaret   |   Read Margaret's bio

related news

How to Claim R&D Tax Credits

Part four of our R&D series answers two common questions about the R&D tax credit: How do I claim the R&D tax credit? Do I really need to claim the…

Read full story

IRS Issues New Guidance on PPP and Employee Retention Credit Eligibility

The IRS issued highly anticipated guidance regarding the employee retention credit (ERC) on March 1. We have previously outlined how the Consolidated Appropriations Act, passed in December, permitted employers receiving…

Read full story

Honoring International Women’s Day

In honor of International Women’s Day, I’d like to take a moment to recognize the talented women who have helped build our outstanding reputation within the business community – both…

Read full story

How to Calculate R&D Tax Credits

As we’ve seen in the first two installments of this series, business owners often miss out on the R&D tax credit opportunity and the bottom-line infusion it can provide. Many…

Read full story

Doing Business in Mexico: What to Expect this Year

Without a doubt, this year will be interesting for Mexico. To start, it’s an election year and we all know what that means…a lot of uncertainty. As the global pandemic…

Read full story

Categories

Jump directly to the topics that matter to you most.

  • A&E Professional Services
  • About Us
  • Advisory & Assurance
  • Business Owners
  • C&M Press Releases
  • Careers
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  • Clayton & McKervey
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  • Expanding Outside the U.S.
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  • International
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  • Beth Butchart
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  • Clayton & McKervey
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  • Jim Biehl
  • Julie Killian
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  • Margaret Amsden
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  • Nina Wang
  • Rob Dutkiewicz
  • Ruben Ramirez
  • Sarah Russell
  • Sue Tuson
  • Tarah Ablett
  • Teresa Gordon
  • Tim Finerty
  • Tim Hilligoss
  • Wendy Reedy

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Additional news from Clayton & McKervey can be found below.

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