Preparing for the New Year: Expense Reimbursements

As we enter the new year, it’s important to take a look and ensure you’re entering 2018 on the right foot. There are several things you need to remember to keep your business in compliance. One of these things is your expense reimbursement policies.

The IRS defines business expenses as ordinary and necessary costs for carrying out your trade or business. So when we talk expense reimbursement, we’re referring to paying your employees back for what they spent (of their own money) on business-related expenses.

Not only should your business have an expense reimbursement policy, but that policy has to be compliant with the IRS and Department of Labor.

An Accountable Plan

The IRS states the following conditions must be met for your expense reimbursement to be in compliance:

  • A business reason. There has to be a business reason for the expense. In other words, you can’t just go out for drinks and submit it for reimbursement. It has to have a connection with the services your employee is performing.
  • It has to be validated. You have to have receipts or invoices that document the amount and nature of the expense being submitted for reimbursement.
  • No excess. Your employees need to return any amounts that were paid in excess of the validated expenses.

When these three conditions are met, it’s referred to as an accountable plan. This is important to know because if you’re deemed to have a non-accountable plan, the amounts reimbursed to your employees could be considered income and need to be included on the Form W-2. An accountable plan, on the other hand, allows reimbursements to not be considered taxable.

The Five “Ws” and a few other items

Meal Reimbursements
One of the key expenses often paid through reimbursement are meals. Yes, the IRS has specific rules about this.

If you’re not using a per diem allowance (go here to learn more), the IRS has specific requirements to substantiate your actual meal receipts. It’s known as the five “Ws”:

  • Who was there?
  • Why is the meal considered official business?
  • Where did the meal occur?
  • What was the cost of the meal?
  • When did the meal occur?

Automobile Expenses

The IRS also has rules when it comes to automobile expense reimbursements. Again we go back to the rule of substantiation. The policy related to automobile expense reimbursements must describe how your employees use a vehicle for business expenses. This applies to both an automobile owned/leased by your company as well as mileage reimbursement and personal use.

As a note, personal use of a company vehicle have to be included in taxable income.

The Department of Labor

The Department of Labor also has rules when it comes to expense reimbursements. These rules include:

  • The Five “ws”. The DOL also adheres to the 5 Ws when documenting all expenses to be reimbursed. Further, they also require your employees provide the original receipt and written description. If the receipt is lost, your policy has to state that you require a signed statement from the employee regarding the lost receipt.
  • Substantiation for all. The IRS has an exception that allows you to not have to keep records for any expense (excluding lodging) that is less than $75. This is not true with the DOL. The DOL states that all reimbursed expenses have to have the proper records.
  • For meal expenses, the DOL requires itemized receipts. In other words, the credit card slip won’t work. You need the actual ticket that details what each person ordered, as well as the credit card slip that indicates how much tip was left.
  • Automobile rules. When it comes to organization owned leases/vehicles, employees must furnish date of travel, number of miles driven, whether it was for personal or business and the odometer reading. If your policy also includes reimbursement for personal vehicles, the DOL states you have to have at least one record that includes date of travel, locations traveled to and from, number of miles and business purpose.

The moral of the story

Make sure your policy for expense reimbursements is in compliance as we kick off the new year. By setting these rules in place, you’ll ensure your employees not only have the information they need as they travel for work, but that your business is in compliance with the IRS and the DOL.



Expense Reporting & Fraud: What You Need to Know

By Eide Bailly’s Forensics Dept. 

We all know fraud happens. Whether it be with money, identity or even politics, fraud is constantly happening, and many people aren’t even aware of it. Unfortunately, fraud can hit close to home for many business owners. The main reason for this is fraudulent expense reporting by employees.

A recent survey conducted by the Association of Certified Fraud examiners found that the median loss from expense reimbursement fraud was a whopping $30,000 per year. In other words, this could really hurt your business’s bottom line.

My employees are great; this would never happen to me…

Five percent of employees commit 82 percent of all expense fraud, according to an Oversight Systems report. While not a staggering number, this amount still shows that expense fraud is happening within businesses, and people are getting away with it.

Okay, so how can I be on the lookout and prevent this from happening to me?

We’re glad you asked. As with most internal controls, creating a solid, clear policy is a great starting point. It’s also a good idea to have a reviewing policy for reimbursement requests as well.

Do you have to review everything 100%? Not likely. Reviewing on a random sample basis, as long as employees know this is taking place, should be enough to ensure the policy is being followed. By setting up this “perception of detection,” employees will be less likely to sneak around due to the increased chance of them getting caught.

What should a reimbursement policy look like?

There is no one-size-fits-all type of policy. Your specific policy should match up with the needs of your business. However, there are some elements to consider including to create a strong reimbursement policy:

  • Timely Reporting – Have a set amount of days the expense needs to be submitted within.
  • Appropriate Expenses – The policy should be clear on expectations regarding controversial charges, such as alcohol, family meals, expensive hotels, etc.
  • Proper Documentation – Require the employees to submit actual receipts, whether it be the original or a reprint. Seeing the amount clearly documented leaves less room for error.
  • Minimum Receipt Amount – Some amounts may not require a receipt. Set a reasonable receipt level, such as $25, below which a receipt isn’t needed.
  • Chargeback Rules – If any undocumented charges are found during a review, consider having a clear policy regarding how these expenses will be potentially charged back to the employee.

The moral of the story…

Prevention is much easier (and less expensive) than detection. Creating a reimbursement policy can help ensure expense fraud isn’t stealing from your business’s bottom line. If you need help creating this policy, or just want to learn more, our forensics team is here to help!

A version of the post was first published on Eide Bailly’s Nonprofit Newsletter.