IRS Tax Cheat Sheet for SMBs
Tips and strategies that you can implement in Trippeo to save you time and money at tax season
Tax season can be daunting and imposing. Like the tax man is going to barge into your office and demand an itemized list of every expense you’ve claimed, and then ask for a ten-point justification per charge.
Thankfully, our customers know that with Trippeo’s seamless expense tracking app, they can account for every expense. In this post, we’re going to go over some strategies that you can implement right into your Trippeo account. These strategies help you better understand the operational techniques that will save you time, stress, and money during tax season.
First, know the law.
The IRS has stringent qualifications concerning what counts as a business expense, and how to account for said expenses. Without a complete set of records, you can’t legally claim your expenses against your taxes. The following is meant to be read as a brief to help you get in line, and save you from the drudgery of IRS Publication 535, but it shouldn’t take the place of a finance professional.
Business expenses fall into two categories, according to the IRS. An Ordinary Expense, as defined by the IRS, “is common and accepted in your trade or business,” whereas a Necessary Expense is defined as a “one that is helpful and appropriate for your trade or business.” Basically the difference is a cup of coffee with a client vs. a new copier machine after the one in Sales caught fire.
While an expense does not have to be indispensable to be considered necessary, it’s still the at discretion of the company to decide what to reimburse. The benefit lies in the ability to deduct all, or part of the cost of an expense from the company’s owed taxes as long as the employee is reimbursed. TL;DR? Reimbursing your employees for business expenses is good for the company tax return.
Of course, the IRS isn’t looking to hand out money. They have a stringent conditions surrounding reimbursements. So when you’re organizing your policy, make sure that you’ve considered the following rules:
- Expenses over $75 must have a receipt.
- Never reimburse an employee for a ticket, summons or other expense incurred as a result of illegal activity. No reimbursements for parking tickets.
- Employees need to provide contextual information about the expense such as amount, date, merchant and what it was for to be considered a complete record. Trippeo provides fields for these, so you don’t need to worry about forgetting.
- Expenses should be submitted within 60 days of the expense being incurred.
Once you’ve made these policies clear, you can rest easy knowing that the information you’re getting from your employees is accurate and in-line. Want a little more security? With Trippeo, you can enforce these very tenets right inside your Policies section.
Next, Determine a Mileage Policy
The IRS mileage rate is calculated based on the average cost of owning and operating a vehicle, compared to the average number of miles driven and is recalculated each year. Using this, alongside any tolls and parking costs your employees incur is the best way to track mileage reimbursements for employees on the road. You are allowed to use a different rate based on your own calculations, but the IRS will likely penalize your company with tax deduction consequences.
So where can you get this IRS calculation? Well… they don’t share it. We don’t know why either. But AAA does complete annual research to help estimate the cost/mile of owning and operating a vehicle. You can check out an AAA trip calculator here. It will give you an IRS-approved calculation of the expense-able mileage from your trip.
Setting your Expense Policy
Violation of policies are usually a result of a lack of understanding, or having access to policy documents. Say no to a downloadable PDF that needs to be updated every 2 months! Trippeo’s Policy settings let you set policies that are accessible and enforced according to your team members. Your administrators can set policies according to individuals on their team that reflects their levels of permission within the company. You can also include limits for specific categories.
We’ve written a few examples of the kind of limits you can establish below:
- Expenses over $__ should always have a receipt.
- Client meals should not exceed $___.
- Billable expenses should have a client associated with them, and these expenses must have a note.
- All expenses must have a category assigned.
- Reimbursable travel expenses do not include mini-bar, spa usage, in-room entertainment and other hotel amenities.
- Set limits for per diems.
There is a full breakdown per-state listed at gsa.gov, but a short-list of acceptable per-diems can also be found below:
- Require receipts for expenses over a certain dollar amount
It’s important to communicate your expectations regarding how soon after an expense is incurred it needs to be submitted. Having access to an expense management tool when your employees are on the go makes it easy for them to track their expenses, and for admins to reasonably expect them to get their reports over in a timely manner. If you’re receiving reports that have the information detailed above, you can rest easy that come tax time you’re in good shape.
Keep it on the Record
Audits happen. But if you’ve kept a record of your expenses, reports, and receipts, you’ll be well-prepared for a successful audit. However, the success here is based on having well-organized records in the first place. Having your employees organized will go a long way in keeping you sane and on top of your finances. Consult with a finance professional in your industry to understand how to organize your company finances. The IRS only requires you to keep your records for 3 years… but keeping them for longer is a good idea, just in case something arises. And never forget to backup your records.
To protect yourself in the event of making mistakes on your claims, ensure that you:
- Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid: whichever is later.
- Understand that there is no period of limitations to assess tax when a return is fraudulent or when no return is filed. If income that you should have reported is not reported, and it is more than 25% of the gross income shown on the return, the time to assess is 6 years from when the return is filed. So if you have employees, you must keep all your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later
Be Careful with those Corporate Cards
Corporate credit cards are great! Even though the finance department gets the credit statement, they still need to claim their expenses. The IRS has the same rules in place for corporate card expenses as they do for reimbursable expenses: no freebies here. Company cards are often subject to more stringent rules for reimbursement. If this is the case for your company, make sure that you familiarize yourself, lest you be spending on things out of habit, but are–according to your company–not able to expense it.
If you set strong policies and educate your team on how they too benefit from sticking with a unified expense policy, you’re in a great position to conquer tax season.