|
“AUTOMATIC” EXCESS BENEFIT TRANSACTIONS AND IRS ACCOUNTABLE PLANS FOR
TRAVEL
In guidance published in March 2004,
the IRS determined that an unsubstantiated payment to a nonprofit
insider (officer, director and other influential person) is an
“automatic” excess benefit. An excess benefit is defined as a
payment that provides a benefit greater than the value of the item or
service provided. If an organization fails to adequately
substantiate payments as either compensation or reimbursement, the IRS
can levy substantial penalties on both the recipient and the
organization. Whether the amount paid was reasonable has no
bearing if the organization cannot adequately document that an
independent body determined that the payment was consistent with fair
market value and that the organization provided contemporaneous
documentation of that conclusion.
On the IRS web site is a Continuing
Professional Education publication on automatic excess benefit
transactions that highlights the importance of documenting payments.
The PDF document can be found at
http://www.irs.gov/pub/irs-tege/eotopice04.pdf While geared
toward IRS examiners, and the example used is highly unlikely for an NPC,
this document provides useful insight on how the IRS analyzes transactions
from the perspective of determining excess benefit. Don't be daunted
by the length of the document. It has a lot of white space.
While the excess benefit transaction
regulations also apply to compensation for officers, directors and other
insiders, the focus of this discussion is on ensuring that NPCs’ travel
reimbursement policies guard against the possibility of an automatic
determination of excess benefit.
IRS Accountable Plans for
Travel and Meal Reimbursement
Using an IRS accountable
plan provides an organization with a safe harbor against allegations of
excess benefit transactions. All NPCs are strongly advised to
implement such a plan for travel and meal reimbursements. Failure to
do so could result in an IRS determination that payments are taxable
income to the recipient rather than reimbursements. In addition, the
organization would be responsible for the income tax withholding and FICA
taxes, if any, on such amounts. It the payment was made to an
insider, additional penalties could apply.
The following is a general
discussion of the IRS accountable plan rules and is not intended as
specific tax advice. Each NPC is strongly encouraged to seek advice from
its own tax advisor regarding travel and meal reimbursement.
|
Background |
|
 |
To exclude expense
reimbursements, advances, or allowances from wage or compensation
income, the conditions of the IRS accountable plan rules must be met.
In general, the conditions are:
- There must be a business connection between the expense and the
purpose of the activity which is being reimbursed (or for which amounts
have been advanced or allowed);
- There must be substantiation or documentation of the expense and the
business connection;
- In the case of advances, there must be a return to the organization
of any amounts received in excess of substantiated expenses; and
- The organization must require the recipient of the reimbursement,
advance, or allowance to adequately account to the organization for the
expenditures.
The substantiation
requirements for common activities and expenses that are often reimbursed
(or for which amounts are commonly advanced) are discussed below.
To qualify as
reimbursement and not as compensation under an IRS accountable plan, each
expense must be itemized and documented as follows:
-
The amount of the expense;
-
The time and place of the travel or meal;
-
The business purpose of the expense; and
-
The business relationship to the organization of each person
|
Out of Town Travel |
|
|
The IRS rules allow two
options for documenting out of town travel expenses. An
organization should choose one of the following options and use it
consistently. The same requirements apply whether the traveler is
an employee, board member, principal investigator, invited speaker, etc.
Option 1:
Substantiation Method
– Requires detailed documentation and
substantiation of individual expenses. Reimbursement is provided for
the substantiated cost.
Required documentation:
-
Date and time of departure and return
-
Number of days away from home spent on
business
-
Destination city and state
-
For each expense:
-
Amount
-
Time and place
-
Description (hotel, cab, meal, airfare,
etc.)
-
Business purpose
-
Participant’s business relationship to
the organization
The IRS does not require
the organization to collect receipts for expenses less than $75 except for
lodging expenses. However, the above details must still be provided
for each expense. For purposes of internal controls, a nonprofit may
establish a lower threshold for receipts.
Option 2: Per Diem Method
– Allows use of federal per diem rates to establish reimbursement rates
for some expenses and eliminates the need for detailed documentation for
those expenses covered by per diem. Federal per diem rates are
available at
http://www.gsa.gov/Portal/gsa/ep/contentView.do?contentType=GSA_BASIC&contentId=17943
There are two per diem methods
(choose A or B):
A.
Lodging, meals and incidentals (LM&I) are reimbursed using the federal
all-inclusive rate applicable to the destination city and for that day
(some city rates are seasonal). If this method is followed, no
receipts are required for these expenses. However, the recipient
must still substantiate the elements of time and place, the business
purpose of the travel and the business relationship of the traveler.
B. Meals
and incidentals (M&I) are reimbursed at the federal M&I rate established
for the destination city. If this method is followed, no receipts
are required for these expenses although the recipient must still
substantiate the elements of time and place, the business purpose of the
travel and the business relationship of the traveler. However,
under this optional method, the traveler is relieved of the requirement to
substantiate the amount of the meal and incidental expenses, and
therefore need not produce actual receipts for those expenditures.
Lodging is reimbursed on the basis of an original, itemized hotel
invoice (a credit card receipt is not sufficient). Lodging may be
reimbursed at amounts lower or higher than the federal rate applicable
to lodging in the destination city for that day. However, amounts
in excess of the federal per diem rate constitute taxable income unless
substantiated by the itemized hotel invoice.
All
other expenses
(air or train fare, ground transportation, etc.) are
reimbursed at cost based on detailed substantiation documentation as
listed under the Substantiated Method. Detailed descriptions and receipts
are required for items over $75. Detailed descriptions, but not
receipts, are required for items under $75. Use of a personal car is
reimbursed at the prevailing federal mileage rate.
Partial Days of Travel. Out of town travel requiring less than
24 hours away from home does not necessarily entitle the traveler to a
full day of per diem. Under A. or B. an organization may break each
travel day into four 6-hour hour segments and may pay one quarter of the
per diem rate for each full or partial six-hour period. Document the date
and time of departure and return for purposes of calculating per diem.
Travel Allowances: Providing a flat amount regardless of the federal per diem rate (such as
$50 per day) is allowable, but expenses must still be documented as
described under the Substantiated Method or under the Per Diem Method.
Unsubstantiated amounts, including unsubstantiated amounts paid in
excess of the federal per diem rate for the destination city, must be
reported to the IRS as taxable income subject to income tax withholding
and FICA taxes if applicable. If undocumented, such excess amounts
would be considered an automatic excess benefit for nonprofit insiders.
Travel Advances: Amounts “advanced” prior to travel may be based on estimated costs.
However, according to the organization’s policy the traveler must
subsequently substantiate expenses in a detailed travel expense report
as described under the Substantiated Method or using the Per Diem
Method. Excess advanced amounts must be returned to the organization
within a reasonable time, but no later than 120 days after the expense
is incurred. Excess amounts that are not returned within a
reasonable time must be reported to the IRS as taxable income subject to
income tax withholding and FICA taxes if applicable. Again, if
undocumented, such excess amounts would be considered an automatic
excess benefit for nonprofit insiders.
|
Local Business Meals |
|
|
Reimbursement for local business meals must be substantiated by detailed
documentation and an original receipt for expenses over $75. The
IRS requires details, but not receipts, for meals under $75. The
IRS takes no position on reimbursement for alcoholic beverages.
However, alcohol is not allowable for reimbursement under a federal
grant so an organization may wish to establish a consistent policy on
alcohol.
Required substantiation:
-
Amount
-
Time and place
-
Description (meal, refreshments, reception, etc.)
-
Business purpose
-
Name of each participant and their business relationship to the
organization
Again, an organization may establish a lower threshold for receipts and
may require submission of detailed receipts (not just the credit card
receipt) for substantiation.
|
Conclusion |
|
|
An organization must report as taxable income on a Form W-2 (for
employees) or a Form 1099 (for non-employees) any travel and meal
reimbursements that are not in compliance with the IRS accountable plan
rules. Failure to do so puts the organization at risk for back
taxes, interest, and penalties. If the recipient of undocumented
reimbursements is an insider, additional penalties may be levied by the
IRS under the automatic excess benefit rules.
NAVREF encourages NPCs to use Option 2
for travel reimbursements. This simplifies the record keeping
process and prevents unpleasant surprises by letting the traveler know
in advance the amount that will be provided to cover expenses. It
also helps the NPC anticipate and track travel expenses for budgetary
purposes. Travel allowances and advances are not recommended.
Also, NAVREF encourages NPCs to implement local business meal
reimbursement policies that provide that the cost of a single meal will
be less that the federal per diem rate for an entire day.
________________________
Developed by NAVREF in
consultation with Greg Goller, CPA, Partner-in Charge, Not-for-Profit
Solutions Group, Grant Thornton, LLP. |
