For those expenses to be excludible, the arrangement must meet certain requirements of an accountable plan: the employee must be required to substantiate the expenses covered by the arrangement to the person providing the reimbursement and the employee must return amounts in excess of substantiated expenses. The plan also must have a business connection - it must provide advances, allowances or reimbursements only for business expenses allowable as deductions under Code Section 161(B)(1).
The IRS provided the following description of a reimbursement plan that allows electronic substantiation and qualifies as an accountable plan under Rev. Rul. 2003-16.
An employer reimburses business-related travel and entertainment expenses incurred by its employees and at first required paper receipts and expense reports.
Then the employer arranges to have a business credit card issued to each employee likely to incur T&E expenses for necessary business reasons. Employees who use the card receive monthly billing statements from the credit card company and must pay all charges on the bill, including late payment fees.
The employer implements an electronic reimbursement arrangement for T&E expenses that eliminates the need for paper receipts and paper expense reports in most instances. The credit card company provides the employer with an electronic receipt for all expenses billed to an employee´s business credit card on a daily basis. The receipt contains the date and amount of the charge, the merchant´s name and location, and, if available, an itemization from the merchant of each expense included in the charge. The credit card company generally issues three types of electronic receipts to the employer:
(1) a receipt with sufficient information on its face to indicate the nature of the charge (such as a charge from an airline carrier for a passenger ticket);
(2) a receipt with an aggregate charge itemizing each expense (such as a final bill from a hotel listing separately the costs for meals, lodging and telephone calls); and
(3) a receipt with an aggregate charge without itemizing each expense (such as a final bill from a hotel that does not list each charge separately).
The employer transfers the electronic receipts it received to a database. This information cannot be altered once entered. Employees access the database to create an electronic expense report to accompany the electronic receipts associated with their T&E expenses. Employees must indicate whether all expenses are personal or business-related travel and entertainment. For all business-related T&E expenses, the employee must provide the following information in the electronic expense reports for each expense:
(1) a description of the expense and the business purpose it served; and
(2) for each entertainment expense, the names and business relationship of the persons entertained in addition to the date, place, duration and participants in any business discussion that occurred directly before or after the entertainment.
The employer requires employees to submit paper expense reports and receipts for:
(1) any expense over $75 where the nature of the expense is not clear on the face of the electronic receipt;
(2) all lodging invoices for which the credit card company does not provide the merchant´s electronic itemization of each expense; and
(3) any expenses paid for by the employee without using the business credit card. The employer requires that the paper receipts and expense reports contain information sufficient to substantiate the amount, date, time, place and business purpose of each expense.
If the employee incurs a T&E expense for necessary business reasons but pays for it without using the business credit card, the employee must submit paper receipts and a paper expense report.
To receive reimbursements, employees must submit expense reports with any necessary receipts to the employer within 30 days after returning from a business trip or incurring a travel or entertainment expense, but no later than 60 days after incurring the expense. Once the employer approves an employee´s T&E expense report, the employer pays the credit card company for the business expenses listed in the report; the employer does not reimburse any charges not listed in the expense report. The employer treats the reimbursement of any nondeductible business expenses as wages paid to the employee and does not reimburse personal expenses.
The IRS says this arrangement satisfies the essential statutory elements for an accountable plan under Code Section 62(a)(2)(A) and (c). These requirements are:
(1) business connection - it must provide advances, allowances or reimbursements only for business expenses allowable as deductions under Section 161(B)(1);
(2) substantiation - it must require that employees return any amount paid in excess of substantiated expenses; and
(3) return of excess amounts - it must require that employees return any amount paid in excess of substantiated expenses.
If an arrangement does not satisfy one or more of these requirements, all amounts paid under the arrangement are paid under a nonaccountable plan.
Substantiation
An arrangement for travel and entertainment expenses meets the substantiation requirement of Treas. Reg. §1.61-2(e)(1) if the arrangement requires each business expense to be substantiated to the payor within a reasonable period. An arrangement meets the substantiation requirements if the employee makes an adequate accounting to the payor that satisfies the substantiation requirements of Section 274(d), i.e., by adequate records or by sufficient evidence to substantiate the requisite elements of each expenditure. The substantiation elements vary slightly depending on whether the expense is for travel or for business entertainment. To substantiate each element, the regulations require that the taxpayer must maintain the following:
(1) an account book, diary, log, statement of expense, trip sheet or similar record; and
(2) documentary evidence that, in combination, is sufficient to establish each element of an expenditure.
Lodging Expenses
Contributing Editor David Fuller says the revenue ruling "leaves a gaping hole" with regard to reimbursements for lodging expenses when the electronic receipts do not specify the detailed lodging expenses (the hotel folio issue). He notes that few, if any, of the detailed hotel bills or hotel folios are currently being provided electronically to taxpayers notwithstanding the contrary implication given in the ruling.
Although the ruling makes a point to structure facts both with and without detailed electronic hotel folios, it does not prohibit the use of nondetailed electronic hotel receipts when other appropriate substantiation limitations are applied in conjunction with such electronic receipts. Nonetheless, the ruling has a chilling effect on the use of such electronic lodging receipts even though they are the industry standard.
Since lodging is one of the largest elements of business travel, the ruling´s effects and benefits will be severely limited if it is not applied to the standard electronic lodging receipts. Fuller cautions that most employers will continue to implement an administratively burdensome process that requires paper hotel folios to be retained, submitted and stored.
"This hotel folio issue has existed ever since the IRS issued the first ruling on this subject to me on behalf of one of our clients seven years ago - I had hoped the IRS would resolve this issue in a mutually satisfactory method for taxpayers and the Treasury. Hopefully, the IRS will formally recognize appropriate safeguards that, in conjunction with standardized electronic lodging receipts, will allow employers to adopt broader and more meaningful electronic T&E programs."
Finding Out More
Employers and plan administrators can find out more about Rev. Rul. 2003-106 by calling Joe Spires of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), its principal author, at (202) 622-6040.
This article appeared in the Employer''s Handbook: Complying with IRS Employee Benefits Rules by Thompson Publishing Group. For more information about the Handbook, see http://www.thompson.com/libraries/benefits/disc/index.html.