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Travel is a major expense for most NPCs. Travel is also among the NPC activities that are most frequently scrutinized by the IRS, the VA Inspector General (IG) and the NPPO.  Inadequate documentation of a business purpose for travel may lead the IRS and the IG to conclude that the expenses were for personal travel, not official business, and that associated reimbursements constitute personal income. 

As a result, NPCs are encouraged to have well thought out travel policies and to enforce them rigorously. It is extremely important that NPCs require travelers to provide documentation that supports a VA research or educational justification for the travel. NPC-reimbursed travel may be directly relevant to a specific research project, or it may be documented to support VA research or a PI's research more generally.  For travel related to educational or training activities with no research relevance, the VAMC Education Committee must approve the activity prior to reimbursement by the NPC.

Make sure that the NPC reimburses the traveler only for essential costs such as conference registration, transportation, accommodations and meals using an "IRS accountable plan." Original receipts must be submitted for reimbursement; a traveler's monthly credit card statement is not appropriate documentation.  Entertainment expenses generally have a personal benefit and may not be reimbursed by an NPC.

To be an accountable plan, each reimbursed expense must: 1) have a business purpose; and 2) be substantiated with written documentation. Paying travelers – employees and PIs -- a flat per diem rate of $50 or $75 without requiring justification for the full amount may put an NPC at risk of penalties and may incur tax liabilities for the recipient.  Moreover, penalties and taxes will be applied to the entire reimbursement, not just the item that is not justified.

“Automatic” Excess Benefit Transactions

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.


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:

  1. 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);
  2. There must be substantiation or documentation of the expense and the business connection;
  3. In the case of advances, there must be a return to the organization of any amounts received in excess of substantiated expenses; and
  4. 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 1 or 2):

  1. 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.
  2. 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.


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.

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