Acuity Advisors

DOs and DON’Ts for deducting business meal, entertainment, auto and travel expenses

If your business claims deductions for meal, entertainment, vehicle or travel expenses, be aware that the IRS may closely review them. Too often, taxpayers don’t have the necessary documentation to meet the strict requirements set forth under tax law and by the IRS.

Be able to withstand a challenge

DO keep detailed, accurate records. Documentation is critical when it comes to deducting meal, entertainment, vehicle and travel expenses. You generally must have receipts, canceled checks or bills that show amounts and dates. In addition, there are other rules for specific expenses. For example, you must record the business purpose of entertainment expenses, as well as the names of those you entertained and their business relationship to you. If you reimburse employees for expenses, make sure they comply with the rules.

DON’T re-create expense logs at year end or wait until 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. Require employees to submit monthly expense reports.

DO keep in mind that there’s no “right” way to keep records. The IRS website states: “You may choose any recordkeeping system suited to your business that clearly shows your income and expenses.”

DO respect the fine line between personal and business expenses. Be careful about trying to combine business and pleasure. For example, you can’t deduct expenses for a spouse on a business trip unless he or she is employed by the company and there’s a bona fide business reason for his or her presence.

We can help

If you’re hiring employees for summer positions, you may wonder how to count them. There’s an exception for workers who perform labor or services on a seasonal basis. An employer isn’t considered an ALE if its workforce exceeds 50 or more full-time employees in a calendar year because it employed seasonal workers for 120 days or less.

However, while the IRS states that retail workers employed exclusively for the holiday season are considered seasonal workers, the situation isn’t so clear cut when it comes to summer help. It depends on a number of factors.

We can help

These are general rules and there may be exceptions. If your records are lost due to, say, a fire, theft or flood, there may be a way to estimate expenses. With guidance from us, you can maintain records that can stand up to IRS scrutiny. For more information about recordkeeping, contact us..

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Cash- vs. accrual-basis reporting

Qualifying small businesses and service firms often use the cash-basis method of accounting. But as a business grows, it usually needs to convert to accrual-basis reporting for federal tax purposes and to conform with U.S. Generally Accepted Accounting Principles (GAAP). For federal tax purposes, the simpler cash method is generally available to small businesses with annual gross receipts of less than $5 million and to professional services firms of all sizes.

In recent years, Congress has threatened to require more businesses to make the cash-to-accrual conversion, so the IRS can collect taxes sooner. Here’s how these accounting methods differ and why it’s important to pick the reporting option that’s right for your business.

The mechanics

The difference between the cash and accrual methods is essentially a matter of timing. Companies that use the cash-basis method recognize revenue as customers pay invoices and expenses as they pay bills.

Conversely, the more complex accrual-basis method conforms to the matching principle under GAAP. That is, revenue (and expenses) are “matched” to the periods in which they’re earned (or incurred).

Balance sheet implications

Several asset and liability accounts are generally absent on a cash-basis balance sheet. Examples include prepaid expenses, accounts receivable, accounts payable, work in progress, accrued expenses and deferred taxes.

Net effects

Cash-basis entities often report large fluctuations in profits from period to period, especially if they’re engaged in long-term projects. This can make it hard to benchmark the company’s performance from year to year — or against entities that use the accrual method.

Cash-basis entities also tend to postpone revenue recognition and accelerate expense payments at year end. This can make a company appear less profitable to lenders and investors. But the flipside is that this strategy temporarily defers the company’s tax liability.

Accounting expertise

Getting the IRS to approve a switch from cash to accrual reporting (or vice versa) requires some administrative legwork. We can help small businesses and service firms make the conversion for accounting and tax purposes. Moreover, we can help you adjust cash-basis financial statements to benchmark against other companies that use accrual-basis reporting methods.

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How many employees does your business have for ACA purposes?

It seems like a simple question: How many full-time workers does your business employ? But, when it comes to the Affordable Care Act (ACA), the answer can be complicated.

The number of workers you employ determines whether your organization is an applicable large employer (ALE). Just because your business isn’t an ALE one year doesn’t mean it won’t be the next year.

50 is the magic number

Your business is an ALE if you had an average of 50 or more full time employees — including full-time equivalent employees — during the prior calendar year. Therefore, you’ll count the number of full time employees you have during 2016 to determine if you’re an ALE for 2017.

Under the law, an ALE:

Is subject to the employer shared responsibility provisions with their potential penalties, and
Must comply with certain information reporting requirements.

Calculating full-timers

A full-timer is generally an employee who works on average at least 30 hours per week, or at least 130 hours in a calendar month.

A full-time equivalent involves more than one employee, each of whom individually isn’t a full-timer, but who, in combination, are equivalent to a full-time employee.

Seasonal workers

We can help

Contact us for help calculating your full-time employees, including how to handle summer hires. We can help ensure your business complies with the ACA.

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Control fraud risks with strong internal controls

Fraud costs companies 5% of their annual revenues each year, according to the 2016 Report to the Nations on Occupational Fraud and Abuse published by the Association of Certified Fraud Examiners (ACFE). To illustrate what this means, the global fraud study reports that the median fraud loss among for-profit businesses was approximately $180,000.

Your company can lower its fraud risks by implementing various policies and procedures. A strong control system reduces the opportunity to commit fraud, making it harder for dishonest people to steal assets, engage in corrupt business practices or manipulate your company’s financial statements.

A worthwhile investment

Managers may be reluctant to invest in internal controls for various reasons. They may have limited resources and underestimate the value of a strong control system. Or they may mistakenly believe that implementing internal controls will signal distrust toward employees, suppliers and customers.

But investing in antifraud measures can be money well spent: The ACFE reports that the presence of strong controls was correlated with both lower fraud losses and quicker detection. Additionally, a lack of internal controls was cited as the primary factor in 29% of the cases analyzed in the 2016 fraud report.

Elements of internal controls

The most common internal control measures implemented by U.S. companies in the 2016 fraud report include:

Corporate codes of conduct,
Independent external audits of the financial statements, and
Employee support programs.

Some internal controls — such as management reviews, job rotation and mandatory vacations — are relatively inexpensive. These simpler options can be effective for smaller private companies with limited budgets.

Fortifying your defenses

Fraud has been a hot news topic in recent years, causing companies to reinforce their defenses. The ACFE reports that, compared to 2010, the use of whistleblower hotlines is up 9% and fraud training programs for employees have increased by 8%. Contact us for help evaluating your internal control system — or investigating fraud if you suspect wrongdoing.

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Tax break for qualified summer youth workers and other employees

Is your business hiring this summer? Employing certain teenagers and other individuals may qualify you for the Work Opportunity tax credit (WOTC), if you meet certain requirements. This tax break applies to a percentage of wages paid to new employees from certain target groups, including “qualified summer youth” workers.

Eligibility rules

A qualified summer youth employee must:

Be age 16 or 17,
Not have worked for you before,
Work for your business during any 90-day period between May 1 and September 15, and
Reside in a federal Empowerment Zone.

The credit for summer youth employees can be up to $1,200 per qualified worker. There’s no limit on the number of eligible youths you can hire and claim the WOTC for. However, you can’t claim it for employing dependents or relatives.

Certification rules

If you hire a 16- or 17-year-old for the summer, you must obtain certification that the individual is qualified. The process involves submitting an IRS form to a state workforce agency where your business is located. You must also meet certain deadlines.

To find out if a teenager lives in an Empowerment Zone, you can search an address using a U.S. Department of Housing and Urban Development tool at http://egis.hud.gov/ezrclocator.

Other qualified individuals

Be aware that the rules for hiring employees from other targeted groups who qualify for the WOTC are different from the rules for summer youth. These individuals include qualified long-term family assistance recipients, veterans, ex-felons and long-term unemployment recipients. The WOTC is also available if your business hires individuals, ages 18 to 39, who live in an urban Empowerment Zone or certain rural areas. The credit for hiring qualified individuals (other than summer youth) ranges from $2,400 to $9,600, depending on the target group of the employee and how many hours he or she has worked.

We can help

Contact us for more information about the WOTC and meeting the certification requirements for summer youth or other qualified workers.

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