1. UNC Fin Sys Workshop 3-26-2007 The University of North Carolina at Charlotte Office of the Controller 1 Accountable Plans Anne E. Davenport Tax Manager, UNC Charlotte

2. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 2 Income is governed under §61 of the Internal Revenue Code “Except as provided in this subtitle, gross income means all income, from whatever source derived…” …cash or noncash benefit …fringes, “found money”, gambling, babysitting, raffles, lotteries, barters, scholarships, gifts, housing, donations, eBay sales, garage sale proceeds, embezzlement, bank robbery,… Income

3. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 3 §62 through §1500 are the “exceptions” provided in this subtitle. §62(a) General rule. For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions: (1)Trade and business deductions… (2)Trade and business deductions of Employees. (A) Reimbursed expenses of employees. The deductions allowed by part VI ( section 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer. [..] (B) Certain expenses of performing artists… (C) Certain expenses of officials… (D) Certain expenses of elementary and secondary school teachers... (E) Certain expenses of members of reserve components of the Armed Forces of the United States…

4. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 4 (Reg. § 1.62-2(c)(1)) An Accountable Plan is a reimbursement or other expense allowance arrangement that: provides advances, allowances or reimbursements only for business expenses allowable as itemized deductions that are paid or incurred by the employee in connection with services as an employee: the business connection requirement (see Reg. § 1.62-2(d) ) Reg. § 1.62-2(d) requires that the employee substantiate each business expense to the payor (see Reg. § 1.62-2(e) ) and Reg. § 1.62-2(e) requires the employee to return to the payor, within a reasonable time, any amount paid under the arrangement in excess of the expenses substantiated. ( Reg. § 1.62-2(f) ) Reg. § 1.62-2(f) The payor of the reimbursement, advance or allowance may be an employer, the employer's agent or some third party. ( Reg. § 1.62-2(b) ) (See FTC 2d/FIN ¶ L-4700 et seq.; United States Tax Reporter ¶ 624.02; TaxDesk ¶ 29,600 et seq.; TG ¶ 17800 et seq.) Reg. § 1.62-2(b) FTC 2d/FIN ¶ L-4700

5. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 5 Taxpayers must substantiate, by adequate records, the following types of expenses in order for them to be deductible: travel expenses, including the cost of meals and lodging while away from home; expenses required for your job, including uniforms, books, training, desks, computer, printer, chair, files, cabinets, etc. entertainment, amusement or recreation expenses, and expenses relating to facilities used for these activities; the cost of business gifts; or expenses relating to any listed property (including cars). (Code Sec. 274(d)) Estimates made under the Cohan rule for these expenditures are not deductible. (Reg. § 1.274-5(a) ; Reg. § 1.274-5T(a)) §274 and Regulations Substantiation of Reimbursed Employee Expenses, What’s Allowed:

6. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 6 Substantiation of Reimbursed Employee Expenses, No “Estimates”: The substantiation requirements for travel, entertainment, gift and listed property apply to all of a taxpayer's claimed business travel and entertainment expenses. The Tax Court rejected taxpayer's argument that if he satisfies the travel, entertainment, gift and listed property substantiation requirements for some expenses, the court could use the Cohan Rule to estimate additional allowable business travel and entertainment expenses. (Brain, Irving Jr., (1990) TC Memo 1990-35, PH TC Memo ¶90035, 58 CCH TCM 1249 )

7. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 7 No deduction is allowed for away-from-home travel expenses, entertainment expenses, business gifts or listed property (including cars) expenses unless the taxpayer substantiates each of the following elements for every separate expenditure: amount of the expense, or item; time and place of travel, entertainment, amusement, etc.; date and description of business gifts; business purpose of the expense or item; business relationship to taxpayer of each person entertained or receiving a gift. ( Code Sec. 274(d) ; Reg. § 1.274-5(b)(2) ; Reg. § 1.274-5T(b)(2) ) Substantiation of Reimbursed Employee Expenses, Business Purpose:

8. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 8 If a plan reimburses business expenses that are not travel, entertainment, gift or listed property expenses, sufficient information must be submitted to the payor to enable the payor to identify the specific nature of each expense and to conclude that the expense is attributable to the payor's business activities. Therefore, each of the elements of an expenditure or use must be substantiated to the payor. It is not sufficient if an employee merely aggregates expenses into broad categories (such as travel) or reports individual expenses through the use of vague, nondescriptive terms (such as miscellaneous business expenses). ( Reg. § 1.62-2(e)(3) ) Substantiation of Reimbursed Employee Expenses, cont:

9. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 9 Special deemed substantiation rules make it easier for taxpayers to meet the substantiation requirements as to the amount of the expenses when the plan provides per diem or mileage allowances. (Reg. § 1.62-2(e)(2) ) For per diem allowances for travel away from home and mileage allowances for transportation expenses paid by employers to employees. Substantiation of Reimbursed Employee Expenses, Standards:

10. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 10 Reimbursable expenses for which the employee claims no reimbursement are not ordinary and necessary business expenses of the employee. Thus, if an employee pays travel expenses for which he could have obtained reimbursement from his employer, the expenses are not deductible by the employee. Where a taxpayer is under no obligation to make the expenditure and fails to show that his employer would not reimburse him, he can't deduct the expense. Substantiation of Reimbursed Employee Expenses, No Documentation:

11. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 11 Original (paid) receipts required for: Airfare Airport shuttles (Max $5 w/o receipt) Taxis Parking,Tolls, Road fees Hotels Conference Registration fees Meals (Per diem allowed w/o receipt) Mileage (Standard allowed w/o receipt) Telephone Charges Substantiation of Reimbursed Employee Expenses, Receipts: State of North Carolina State Budget Manual Travel Policy

12. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 12 Regs. §1.62-2(c) (2) Accountable plans. (i)In general. Except as provided in paragraph (c)(2)(ii) of this section, if an arrangement meets the requirements of paragraphs (d), (e), and (f) of this section, all amounts paid under the arrangement are treated as paid under an “accountable plan.” (3) Nonaccountable plans. (i) In general. If an arrangement does not satisfy one or more of the requirements of paragraphs (d), (e), or (f) of this section, all amounts paid under the arrangement are treated as paid under a “nonaccountable plan.” If a payor provides a nonaccountable plan, an employee who receives payments under the plan cannot compel the payor to treat the payments as paid under an accountable plan by voluntarily substantiating the expenses and returning any excess to the payor. Substantiation of Reimbursed Employee Expenses, Insufficient Documentation:

13. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 13 Substantiation of Reimbursed Employee Expenses, Insufficient Documentation: Cont. (4) Treatment of payments under accountable plans. Amounts treated as paid under an accountable plan are excluded from the employee's gross income, are not reported as wages or other compensation on the employee's Form W-2, and are exempt from the withholding and payment of employment taxes (5) Treatment of payments under nonaccountable plans. Amounts treated as paid under a nonaccountable plan are included in the employee's gross income, must be reported as wages or other compensation on the employee's Form W-2, and are subject to withholding and payment of employment taxes

14. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 14 (d)Business Connection (e)Substantiation (f)Reconciliation, returning excess (g)Reasonable Period (…some flexibility, NC = 30 days) Accountable Plan, requirements:

15. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 15 Student Travel Business Purpose – required by employer Accountable Plan Rules. Match travel fund to wages fund Did the student get PAID to travel? 20 hr/week max. Travel without a business purpose Field trip rules will cover all group expenses Scholarship rules for individual payments (withholding) Athletic or Academic Team Travel - exempt

16. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 16 Non-employee Travel Business Purpose – would be deductible if self paid. Accountable Plan Rules, receipts, substantiation, timing. Cannot pay per diem, so roll it into the Honorarium W-9 for US Citizens and Residents W-8BEN for Foreign Nationals (don’t pay F-2s, check status) Travel to a Symposium or Conference Pay group hotel, meals, activities. Avoid payments to individuals. 1099s if ALL accountable plan rules aren’t satisfied.

17. The University of North Carolina at Charlotte Office of the Controller UNC Fin Sys Workshop 3-26-2007 17 Questions?