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.

 

 

Business Equipment: Lease v. Buy

One of the things you may not have considered as a business owner are your equipment needs. Will you buy it outright? Or lease it? It’s a question you’ll face and an answer that’s not easy (did you expect anything less?).

Here’s the short answer: It depends on your situation.

Here’s the slightly longer one: Each business is unique and the decision to buy or lease business equipment must be made on a case-by-case basis. There are pros and cons to each one. Read on for more details.

To lease or not to lease?
Leasing can be a good option for business owners who have limited capital or need equipment that must be updated every few years. Leasing preserves capital and provides flexibility. However, it may cost you more in the long run.

Advantages:

  • Less initial expense. This is the primary advantage as it allows you to acquire assets with minimal initial expense.
  • Down payment is either very low or non-existent.
  • Payments may be a deducted as a business expense. Just make sure you check with your tax accountant on the appropriate lease to obtain.
  • Flexible terms as leases are usually easier to obtain and have more flexible terms than loans. This can be significant if you have bad credit or need to negotiate a longer payment plan to lower your costs.
  • Easier to upgrade equipment as leases allow you to address the problem of equipment no longer being used or useful. You are free to lease new, high-end equipment after your lease expires.

Disadvantages:

  • Higher overall cost. Leasing an item is almost more expensive than purchasing it. For example, a three-year lease on a computer worth $4,000 will cost you a total of $5,760 vs. buying out right at $4,247 (taking into consideration the time value of money), a savings of $1,513 by purchasing vs. leasing.
  • You don’t own it, so you don’t build any equity. Lack of ownership can be a significant disadvantage.
  • Obligation to pay for the entire lease term even if you stop using the equipment. Some leases give you the option to cancel the lease if your business changes direction and the equipment you leased is no longer necessary. However, you could incur an early termination fee.

To buy or not to buy?
Purchasing equipment can be a better option for established businesses or for equipment that has a long usable life. Ownership and tax breaks make buying business equipment appealing. However, the initial costs mean this option isn’t for everyone.

Advantages:

  • Ownership is the biggest advantage of buying equipment. This is especially true when the property has a long and useful life and is not likely to become technologically outdated in the near future, such as office furniture or farm machinery.
  • Tax Incentives. Check with you tax accountant to get the latest tax incentives that the IRS will allow.

Disadvantages:

  • Higher initial expense. If you pay cash, it takes away working capital. If you take out a loan, most banks will require a minimum down payment of 20% and lenders may place restrictions on your future financial operations to ensure that you are able to repay your loan.
  • Getting stuck with old equipment. If you buy equipment that is high-tech you run the risk the equipment may become technologically obsolete and will have very little resale value.

So you still haven’t answered the question.
It’s your call to make, not ours. When deciding whether to buy or lease business equipment, figure out the approximate net cost of the asset. Figure in tax breaks and the resale value when making this calculation.

After determining which option is more cost-effective, consider other intangibles such as the possibility the product will become obsolete or that your need for the product will expire before the lease does. Each decision regarding buying or leasing needs to be made carefully to best fit your company’s situation and needs.