1. Executive’s Guide to IRS Travel and Business Expense Rules
August 2012

2. Overview Audit findings and risks IRS “Accountable Plan” rules
Risk of an IRS Audit
Executive Card Use
Travel Expense Rules
Taxable Payments
Business Expense Rules
Club Membership Rules
Summary

3. Internal Audit & Tax Office Findings
Internal Audits has reviewed Executive Card and travel expenses - findings included:
Documentation of expenses was sometimes inadequate
Reimbursements were not appropriately authorized
Expense reporting methods were not consistent
Tax Office has reviewed the Travel Policies and Procedures – findings included:
Clarification needed for the IRS Accountable Plan Rules
IRS exception needs to be identified for foreign travel
Explanation needed for Executive Card paid centrally

4. IRS “Accountable Plan” Rules
In order for an employee to receive non-taxable (tax- free) reimbursement the following rules must apply:
Each expense must have a business purpose and be adequately documented
Original receipts for expense items over $75
Spousal/family travel and/or meals are not business expenses
Expenses must be substantiated within a reasonable period – travel expenses must be in SAP Trip 90 days from the end of the trip or for non-travel business expenses, 90 days from the date paid
For travel advances, any excess must be repaid within 14 days from the end of the trip

5. Risk of an IRS Audit
IRS is targeting University compensation including business expenses of officers and key employees
Last 18 months IRS has become more aggressive than the last 6 years combined
Audits at University of California, Princeton and others
Possible outcomes of an IRS audit
Undocumented or inadequately documented reimbursements would be considered an “automatic” excess benefit
Full amount reimbursed would have to be repaid by the individual
Penalties would be assessed at 25% to the individual
All travel and business expenses could be disqualified
The University would be charged for employer FICA tax on all travel and business expenses for the period under audit (Employer’s share of FICA on $60M of travel and business expense reimbursements would be almost $5M)
Reimbursements would become taxable income to all employees who were reimbursed for travel or business expenses
A settlement with the IRS could be reached requiring payment to the IRS.

6. Executive Card
Under IRS rules, the Executive Card which is paid centrally by the University is considered an advance.
All expenses must be adequately documented and accounted for within 90 days from the end date of the trip or from the date of the expense for business expenses not related to travel.
Travel expenses paid on the Executive Card are to be reported in SAP Trip as “prepaid” within 90 days from the end date of the trip
Personal expenses on an Executive Card should be repaid to the University within 30 days

7. Travel Expense Rules
SAP Trip is the “official record” for all travel expenses; its features support the Accountable Plan rule requirements
All business expenses for the trip must be included in SAP Trip
Prepaid expenses in SAP Trip include:
Business expenses reimbursed in advance
Business expenses paid directly to a vendor (e.g. travel agency bills the University for airfare)
Business expenses paid using the Executive Card
After 90 days from the end of the trip, all business expenses for the trip would be reported as prepaid – the reimbursement cannot be paid through Accounts Payable after 90 days, see Taxable Payments slides

8. Domestic versus International Travel
All business expenses can be reimbursed tax-free with proper documentation if substantiated within 90 days from the end of the trip
International – special rule
All business expenses can be reimbursed tax-free with proper documentation as long as this IRS exception applies
Vacation was not a major consideration for the trip
If this exception does not apply contact the University Tax Office

9. Taxable Payments Defined
These expenses are taxable if paid to (or on behalf of) the employee:
Expense reimbursements 90 days after the end of the trip or 90 days from the date paid for non-travel business expenses
Spousal/family travel expenses and/or meals
Non-business expense paid on an Executive Card that has not been reimbursed within 30 days from the date of the purchase

10. Business Expense Rules
Types of business expenses other than travel
Business Meals (not related to business travel)
Entertainment with a business purpose
Club memberships (requires documentation of all use)
Documentation of each business expense must include:
Date and amount
Location of the activity
Business purpose
Names of those who attended, and
Business relationship of each person named
Overnight travel should be submitted separately from local travel, fully costed with all expenses for the trip
Local travel, such as mileage and parking, should be submitted monthly

11. Club Memberships Rules
Annual fee for clubs
IRS Rule: Must be allocated between business and personal based on actual usage
Non-business portion is taxable income if paid by JHU
Annual membership fees paid by JHU will be treated as taxable income (with a gross up for taxes if approved)
Use of club for meals and/or entertainment for business purposes – follow the documentation rules for each activity
Date and amount
Location of the activity
Business purpose
Names of those who attended, and
Business relationship of each person named

12. Summary of Key Points One-up approval with expenses summary template
Timely substantiation of the business purpose with adequate documentation of expenses
Full reporting of all travel expenses in SAP Trip including all “prepaid” expenses
Check box required for foreign travel to identify the IRS exception that applies to the trip
Proper handling of personal expenses as taxable income if paid by the University
Annual membership fees paid by JHU will be treated as taxable income