Incorporating Per Diem Rates And Electronic Receipts Into Travel and Entertainment Plans - January 2004

Keeping track of business travel expenses may have gotten a little easier. The new per diem rates allow a little more cash to cover those away-from-home costs. Plus, electronic receipts can smooth out the paperwork needed to account for reimbursable business expenditures. 

Per Diem Allowances
As you know, standard per diem rates can be used to validate for tax purposes those lodging, meals and incidental expenses that occur on business trips. Although taxpayers have the option of keeping the actual records of travel expenses, IRS-provided per diem allowances can be used instead to substantiate the business travel expenses. 

The per diem allowance amount just went up. The IRS recently released the new figures and they show a slight increase. The simplified "high-low" per-diems have risen slightly to $207 and $126, respectively, up from $204 and $125. The incidental expense per-diem jumps from $2 to $3 per day. This year's annual update applies to per diem allowances paid for travel on or after November 1, 2003. 

While the new rates may be used starting November 1, taxpayers may opt to continue using the "old" 2002 rates for the remaining two months of 2003. There are some transition rules, however, that may restrict payors from switching reimbursement methods mid-stream. 

Electronic Receipts
The IRS also recently clarified that "electronic receipts" can be used to substantiate deductible travel and entertainment expenses. An example of an "electronic receipt" is a business credit card statement sent directly to the employer by the credit card company. Employees are issued credit cards for business expense, receive a monthly billing statement, and are personally responsible for the charges under the credit card agreement. The credit card company also sends the employer an electronic receipt for all expenses billed to each employee's business credit card. 

However, to make sure all expenses are properly accounted for, the employer also requires employees to submit paper expense reports and receipts for:

• Items that are not clear on the face of the electronic receipts;

• Items for which there is no electronic itemization of each expense; and

• Any expenses paid for by the employee without using the business credit card. 

Employees must submit their electronic expense reports and any required expense reports within 30 (but no later than 60) days after incurring the expense. Once the employer approves the employee's travel and expense report, it sends payment for the amount approved directly to the credit card company on behalf of the employee. 

Accountable Reimbursement Plan 
Employees can avoid income tax consequences for business reimbursements or advances if the employer has an accountable reimbursement plan. Accountable plans can include electronic receipts. If made through an accountable plan, employees would not have to recognize the reimbursement money as income or substantiate deductions. A reimbursement plan is an "accountable plan" if it meets the conditions: business connection, substantiation, and return of payments in excess of an employee's actual expenses.

Business Connection. Advances, allowances or reimbursements must be issued only for deductible business expenses made in connection with the employee's performance of services for the employer. The electronic reporting procedures must be able verify whether the expenses are business expenses. 
Substantiation. Employees must submit expense reports, electronic or otherwise, within a short time frame. Employees must have present knowledge of each expenditure, including amount, time, place and business purposes. The electronic data and/or paper documents are adequate records for substantiation purposes. 
Return-of-Excess. Employees are only reimbursed for business expenses that are identified and substantiated with appropriate documentation. Any excess money must be returned to the employer. 

If the employer's reimbursement arrangement does not satisfy all of the requirements, the amounts paid must be included in the employee's gross income, are reported on the employee's W-2, and are subject to withholding and payment of employment taxes. The employee can only deduct properly substantiated expenses as itemized deductions, generally subject to the 2 percent adjusted gross income floor. 

Please contact this office if you want to investigate further the advantages of using the new per diem rates, the new electronic reporting system, or both, to start covering the deductible travel and entertainment costs of your business.

To contact Feeley & Driscoll, please click here or call us at 1 (800) 392-6192.