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Expense Reimbursements - Timing

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    Expense Reimbursements - Timing

    Client is sole shareholder in his S-corporation, which is involved in commission sales. The corporation employs him and one other full-time individual as sales reps, and both report their travel expenses under an accountable plan. The greatest expense is travel using the SMR. The other sales rep is paid commission and the company pays his travel expenses as incurred.

    In 2012 the shareholder made a very large sale, but commissions on it were not received by the company until mid-2013. Because of this delay, the shareholder/sales rep held onto his expense reports, which are legitimate travel expenses he paid from his own pocket. Almost all of the expense reports involved travel related to the big sale.

    Recently the commissions on the big sale were received by the company, and now he intends to submit the expense reports to his corporation, even though many of the expenses were incurred back in mid-2012 and into mid-2013. I know there are time limits for settling up on expense advances, but in this case there were no advances issued to him. If audited is he likely to have any problems regarding the long delay between when the expenses were incurred and when they were reimbursed? There's certainly a legitimate business reason for the delay, but I wonder if IRS has any 'gotcha" rules which might trip him up.


    This except from Pub 463 causes me some concern, ESPECIALLY THE SECOND BULLET POINT, but it is couched in some pretty vague language:

    Reasonable period of time.
    The definition of reasonable period of time depends on the facts and circumstances of your situation. However, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time.
    --> You receive an advance within 30 days of the time you have an expense.

    --> You adequately account for your expenses within 60 days after they were paid or incurred.

    --> You return any excess reimbursement within 120 days after the expense was paid or incurred.

    --> You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement.
    Last edited by JohnH; 09-02-2013, 04:22 PM.
    "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith

    #2
    Hi JohnH - What do you think of recording the expenses in the year incurred with an offset to "Loan from Shareholder"?

    Comment


      #3
      Interesting. Thanks for the suggestion. That is certainly a possibility, but part of his reasoning was to match the expenses closer to the income. It may make sense because his marginal tax rate in 2012 is 15% Federal and 0% state of NC, whereas it will jump to 25% Federal and 7% state of NC in 2013. The year-over-year difference in marginal tax rate is due primarily to the big commission. But the Loan to Shareholder would at least allow him to meet the 60-day safe harbor provision in the Pubs, wouldn't it?

      We're talking about $60K in commission and about $16K in expenses, just for relevance. So there's a tax savings of about $2,700 overall.
      "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith

      Comment


        #4
        Pub 463 refers your situation to Pub 535 under "Who does not need to use this publication". Pub. 535 states that cash basis taxpayers deduct expenses in the time period they are actually paid under "When Can I Deduct An Expense?" on page 4. Is the 1120S filed using the cash basis?
        Last edited by BHoffman; 09-02-2013, 06:49 PM.

        Comment


          #5
          Yes, I forgot to mention that in the original post.
          The S-corp is on the cash basis, as is the sales rep/shareholder.
          Both are also on a calendar year.
          "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith

          Comment


            #6
            Smr

            Similar situation here, but no really large expenses, just myself going out of town to seminars, and eating while at the hotel. Now I think when I set up my S corp's accountable plan I found out that 2 %ers who are employees may not use a standard meal rate, but must use actual meal expenses instead.
            Can anyone else confirm? has it changed?
            ChEAr$,
            Harlan Lunsford, EA n LA

            Comment


              #7
              That's always been my understanding as well, but right now I can't find where it came from.
              The tax book hints at this on page 8-13, but it doesn't specifically say it applies to meals.
              "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith

              Comment


                #8
                I think you'll find it in Taxbook under the chapter on S corps, particularly in the section relating to shareholders/employees.
                ChEAr$,
                Harlan Lunsford, EA n LA

                Comment

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