Tax Rules for Reimbursing Employees Apply to Owners Too

If you were in charge of finance at a large international corporation, you wouldn’t give company money to an employee who merely asked for reimbursement of business expenses.

Instead, you would require the employee to provide substantiation of the expenses paid so you know what was purchased and the cost of every item.

As a small business owner, the same rules apply to reimbursements to you from your enterprise. In fact, the IRS requires that you deploy this process so that your business may obtain tax deductions for the reimbursed expenses.

This permits the company to deduct the amounts spent using the same expense categories as if the business had paid the vendors directly. Making this issue especially complex is the existence of special IRS rules for distinctive types of expenses.

Business Meals

You can slide a bit on keeping precise details about reimbursement for meals. The IRS requires substantiation for reimbursed business meals of at least $75. But you are wise to establish a much lower limit. This is particularly important for solo enterprises that are exposed to IRS questioning about business meal expenses comprising a substantial part of total expenses.

You can probably get by with not having every receipt for coffee you purchased for customers. But receipts are necessary to support claiming larger meals as business meals. Whether reimbursing yourself or employees, a sound practice is requiring receipts for any business meal of at least $25.

Meal receipts should include the name of the business associate for whom the meal was purchased. The business nature of the meal should also be documented, such as the general reason for meeting.

For very large meal costs, such as an entire table for many company attendees at a special event, a recommended policy is recording some details on the receipt. This can entail noting the name of the event sponsor and, in some cases, the name of the caterer.

When reimbursing for travel expenses, the amount for meals must be separated. Surely you do eat when traveling away from home for business, but only half of travel meal costs are tax-deductible, unlike a 100% deduction for travel transportation and lodging. And you cannot deduct any extra costs incurred to bring your spouse along on a trip that’s primarily for business.

Business Mileage

Both you and any employees should have a record of business miles driven with personal vehicles to qualify for reimbursement from the company. A mileage log for each trip will state the number of business miles driven, the location, and the general business purpose.

The reimbursement rate may be whatever you decide. However, the tax deduction cannot exceed more than the amount per mile that’s established by the IRS at least annually.

Business Gifts

Remember that the IRS does not allow a tax deduction for a business gift of over $25. Moreover, if you give a gift to an employee or contractor, many IRS rules are applicable. Most importantly, a gift card to anyone is considered cash compensation. The value of these must be added to the employee W-2 or contractor 1099. Your accountant can help identify other situations where this compensation standard applies.

Claiming Charitable Contributions as a Business Expense

As a general rule, contributions to a charity from your business are not considered business expenses. Only a regular corporation makes charitable contributions on its own behalf and takes a deduction for them from its taxable income. All other businesses do not pay income tax and pass through the tax impacts of their activities to their owners. Among the pass-through acts are gifts to charities.

Unincorporated sole proprietors, partners in partnerships, and shareholders of S corporations treat charitable contributions by their businesses as if they had made the donations themselves. The same rules apply to multiple-member LLCs when they’re taxed as either partnerships or S corporations. Part owners of organizations with multiple partners or shareholders receive a pass-through of business charitable contributions in proportion to their percentages of ownership. Business owners must itemize personal income tax deductions to receive tax benefits from charitable donations.

For the business to have a qualified charitable donation, a monetary cost must be incurred. Hence, no deduction is allowed for the value of an entrepreneur’s time or the time of employees for volunteering with a charity. The amount of deduction for donating a non-cash item is limited to its book value. This is the value not yet already deducted, including deducted depreciation expense. No business charitable contribution has occurred for giving an item whose cost has been fully depreciated or was deducted as an expense when purchased.

Payments to a charity can be counted as ordinary business expenses if they are directly related to business matters. This includes, for example, purchasing advertising from sponsorship of charitable events.