Business Environment – Page 4 – Excelsis Accounting Group

Business deductions for meal, vehicle and travel expenses: Document, document, document

Meal, vehicle and travel expenses are common deductions for businesses. But if you don’t properly document these expenses, you could find your deductions denied by the IRS.

A critical requirement

Subject to various rules and limits, business meal (generally 50%), vehicle and travel expenses may be deductible, whether you pay for the expenses directly or reimburse employees for them. Deductibility depends on a variety of factors, but generally the expenses must be “ordinary and necessary” and directly related to the business.

Proper documentation, however, is one of the most critical requirements. And all too often, when the IRS scrutinizes these deductions, taxpayers don’t have the necessary documentation.

What you need to do

Following some simple steps can help ensure you have documentation that will pass muster with the IRS:

Keep receipts or similar documentation. You generally must have receipts, canceled checks or bills that show amounts and dates of business expenses. If you’re deducting vehicle expenses using the standard mileage rate (54.5 cents for 2018), log business miles driven.

Track business purposes. Be sure to record the business purpose of each expense. This is especially important if on the surface an expense could appear to be a personal one. If the business purpose of an expense is clear from the surrounding circumstances, the IRS might not require a written explanation — but it’s probably better to err on the side of caution and document the business purpose anyway.

Require employees to comply. If you reimburse employees for expenses, make sure they provide you with proper documentation. Also be aware that the reimbursements will be treated as taxable compensation to the employee (and subject to income tax and FICA withholding) unless you make them via an “accountable plan.”

Don’t re-create expense logs at year end or when you receive an IRS deficiency notice. Take a moment to record the details in a log or diary at the time of the event or soon after. The IRS considers timely kept records more reliable, plus it’s easier to track expenses as you go than try to re-create a log later. For expense reimbursements, require employees to submit monthly expense reports (which is also generally a requirement for an accountable plan).

Addressing uncertainty

You’ve probably heard that, under the Tax Cuts and Jobs Act, entertainment expenses are no longer deductible. There’s some debate as to whether this includes business meals with actual or prospective clients. Until there’s more certainty on that issue, it’s a good idea to document these expenses. That way you’ll have what you need to deduct them if Congress or the IRS provides clarification that these expenses are indeed still deductible.

For more information about what meal, vehicle and travel expenses are and aren’t deductible — and how to properly document deductible expenses — please contact us.

Risky Business for Directors – How's your ERM?

Risky Business for Directors Not so many years ago, being elected to the Board of Directors of some companies essentially required you to act as a figurehead. Lunch in an expensive restaurant once a month, an annual retreat to a vacation resort to discuss corporate ‘strategy’ and a small stipend were all that was required in trade for the collective experience and informal leadership. That’s all changed with the increased exposure to liability now faced by corporate governance. With the current state of our business environment, that exposure is greater this year than ever.

In an on-line article Executives Anticipate Rise in Fraud nearly two thirds of the executives polled anticipate an increase in fraud and misappropriation this year. In conjunction with auditors anticipating that nearly 25% of all firms may not be going concerns; the myriad of new regulatory requirements related to governance; and the corporate challenges fomented by a floundering economy this may not be a desirable year to be a Director. The current hot topic seems to be enterprise risk management.

While a long time focus of management, ERM has often been given little attention by the board. Recently, COSO published a document highlighting four critical areas that contribute to effective board oversight. It can be downloaded at www.coso.org.

As public company auditors and consultants we have observed the importance of an integrated approach to governance between the board and management. We regularly participate in joint meetings as frequently as allowed (we don’t charge for meetings with management and the board), for our own self-interest. Our best clients have the strongest most engaged boards. Boards of Directors are invaluable resources. Take full advantage.

E & Y Calls for More Regulation (More Cost)

In a speech at the Commonwealth Club in San Francisco recently, EY CEO James Turley called for more regulation of audit firms. His premise that audit quality has improved as a result of SOX and the PCAOB while ‘possibly’ accurate (and I’m not conceding that) is irrelevant. Foremost I don’t believe that quality has improved for quality firms. I can’t speak for EY. Perhaps they are better for it. The SEC and the PCAOB for all intents and purposes initially adopted the accounting and internal control standards that were already promulgated by the profession. Adding another layer of regulation sufficed only in adding additional cost to public companies. And now Mr. Turley wants to expand that further. Why?

Since my introduction to the profession in the 1970’s when we were attacked by Michigan Democratic Congressman John Dingell, we have fought for self regulation. Obviously the SEC Practice Section of the AICPA (the forerunner to the Center for Audit Quality CAQ) failed miserably and here we are. Based on his leadership, it appears the CAQ is on the same course. One of the defining characteristics of any profession is self regulation. So we apparently have failed as a profession if you are to subscribe to Mr. Turley’s pleading or does he have another motive?

Economists define this propensity of larger firms ‘getting cozy’ with regulators in order to drive up costs and limit competition from smaller firms as ‘regulatory capture’. Banks, drug companies, airlines – accounting firms? Bigger isn’t better, but it certainly seems to be more expensive.

From my days as a young corporate bank officer for a mid-sized California bank in the early 1970’s, I recall having regulatory audits by Federal regulators, the State of California examiners, and the Federal Depositors Insurance Corporation (FDIC). We also had our own internal audit department as did every other bank. And as every other bank has had since then. Total regulation. It’s obviously worked well Mr. Turley. In my professional lifetime a list of the most heavily regulated industries would include banks, airlines, railroads, banks, banks, banks. More regulation. Yeah! That’s the answer.

More recently we have two great examples of failures by federal regulation in Madoff and Stanford. I challenge you to name one economy with more regulation than we have had in the US that has been more successful. Ever. I can list dozens that failed with more regulation.

I disagree vehemently with Jim Turley. Additional regulation if warranted should come from inside the profession – specifically the CAQ which Mr. Turley happens to be the sitting Chair of. Do the job you signed on for with the CAQ Mr Turley. That he wants to abdicate that responsibility is incredibly disturbing. That he proposes to add additonal layers of cost – cost that he and his firm will derive revenue directly from- is unconscionable.