If you’ll forgive me, I’m going to get pretty geeky today.
You probably didn’t realize that there are actual pros and cons to expense reimbursement for employees, etc. or using a company cc. Oh my Indianapolis readers, I’m going to take you down a little rabbit hole today, yes I am.
But first, a quick update on some relief programs we’ve previously discussed.
First, the SBA has stopped accepting new PPP applications as most of the funds for the program have been allocated. So, if you didn’t already apply for a PPP loan for your Marion County business in this funding round, you’ll no longer be able to do so.
Second, the Restaurant Revitalization Fund (RRF) program that kicked off last Monday is now in full swing. So far, the fund has received almost 200,000 applications from bars, restaurants, bakeries, and similar businesses. In my opinion, this is still a small proportion of those who actually need it.
If you run such a business in Indianapolis, or know somebody that does, funds are available to help with payroll and rent. Funds are on a first come, first serve basis for approved applicants. So, just like applying for PPP loans, timing is of the essence.
This is a great program for the right business. To read the SBA program guide on the RRF, go here.
And as I mentioned last week, please do forward this email to any Marion County restaurant owners you may know to make them aware of this program. It is expected that the funds allocated to this program will go quickly, so we want to make sure that all Indianapolis restaurant and bar owners are aware of it.
Now, let’s dive into handling business expenses paid by employees.
Expense Reimbursement vs Company Credit Cards: What Indianapolis Business Owners Need to Decide
“The secret of getting ahead is getting started.” – Mark Twain
You gotta spend money to make money. All businesses need supplies, materials, and services to help produce their own goods and services.
Depending on the nature of your business, your employees may need to make independent purchase decisions on a frequent basis. Empowering your employees to make these purchases on their own can make your business run much more efficiently. After all, do you really need to be involved in the decision to buy a new toner cartridge for the printer?
Common expense types your employees may need to pay for include:
- Office supplies
- Parking and tolls
- Small tools
- Small quantities of parts and materials
All of these expenses, and many others, are necessary to complete tasks required to run your Indianapolis business. The critical question you need to address up front is this: Will you reimburse employees for expenses they pay or provide them a company credit card to pay such expenses?
This decision comes with important tax and accounting consequences, and you as the business owner need to know the pros and cons of each method.
On the surface, issuing employees a company credit card may seem to be the better option in terms of saving time. With a credit card there are no expense reports to be completed, no reimbursement checks to be cut. Sounds good, doesn’t it Marion County friends?
But think about this: Do you need to allocate expenses to specific clients? If your employees are, for example, purchasing parts and materials needed to complete a job for a customer, then those credit card charges ultimately need to be assigned to that customer’s account for invoicing. This means somebody has to go through the credit card statements and reconcile them against receipts and job orders. Oops! There went the time savings.
If you don’t need to do this for tracking expenses back to specific customers, then a company credit card can certainly save some time. Otherwise, having employees complete expense reports and reimbursing them for business expenses they paid out of pocket may actually be faster and easier for your business.
When you provide a company credit or debit card to an employee, you’re placing a significant amount of trust in that person. You need to have faith in your employees that they won’t go on a wild Amazon shopping spree.
If this is a concern, running a reimbursement program might be the better way to go. I’d say this is particularly true if you happen to have a fair amount of employee turnover, or if you operate multiple locations inside and outside of Indianapolis wherein you don’t necessarily know each and every employee. As your business grows, you won’t have direct connection with every single team member, which can exacerbate trust issues.
Use Tax Audits
As more people have worked from home over the last year and have taken their company credit cards with them, one issue in particular has grown quite a bit larger. This has been compounded by state budget issues, causing states to step up their enforcement efforts in order to collect more revenue.
What am I talking about? Use tax.
Use tax is a tax you’re supposed to pay when sales tax wasn’t paid on items used in your Marion County business. If your employees are working from home and order supplies online, for example, those supplies may be being ordered on a website that doesn’t collect and pay sales tax in our state. Thus, you’re supposed to pay the equivalent sales tax in the form of use tax and file a separate tax return for this purpose.
The credit card statement that shows the transactions your employee is making can be demanded by the state when they conduct a use tax audit. As they scrutinize purchases that you may not even really be aware of, they’re looking for those online transactions for items used in your business that were shipped in from out of state, and then you may be liable for a use tax bill or, at the very least, have to pay the cost of us to represent you to fight that tax bill.
This is a clear downside to providing company credit cards to your employees. And for the record, these purchases don’t have to be made from home — they can just as easily be made online right from your Indianapolis office.
If you choose reimbursement for expenses paid out of pocket, you’re going to want to set up what the IRS calls an accountable plan. By running your reimbursement arrangement as an accountable plan, your employees won’t need to worry about reimbursed funds ever being treated as income to them by the IRS, and there are no tax consequences for them. In addition, the accountable plan helps ensure the deductibility of the business expenses for you.
In creating an accountable plan, you’ll:
– Set specific rules about what types of expenses are eligible for reimbursement
– Create a standardized expense reporting form
– Set timelines for reporting expenses and reimbursements
– Stipulate the requirements for substantiation (e.g. paper receipts)
Using an accountable plan instead of company credit cards for each employee can help avoid some of the issues mentioned earlier. You can more closely track the payment of sales and use tax to avoid future surprises, quickly assign expenses to customer jobs for faster invoicing to the customer, and eliminate any potential trust issues.
The trade off? Time and convenience.
If you’re debating this decision, we can analyze the types of expenses your Indianapolis business incurs to help you with making a decision. And also, if you decide to set up an accountable plan, we can help you with that process, too. Let’s talk more about it:
John R. “Rusty” Helms, C.P.A., CGMA