Wednesday, February 23, 2011

War of the Accountants?

Q.  While working at a recent rally, my neighbor in the next booth told me his accountant has his company reimburse him each month for his mileage expenses. My accountant insists I simply take the deduction on my tax return. Who is right? RJ, New Jersey

A.  Probably both of you! It isn't a matter of who, but what. That is, what kind of entity do each of you have. Here's how it can work.

To deduct business mileage, and or actual costs, every taxpayer must keep track of the who, what, where, why and when. In other words, we are required to keep contemporaneous records of who we saw, what the occasion was, where it was held, why, or the business reason, and when, or the dates.

Now you have options. If you are a sole proprietor and don't pay yourself a salary or have an accountable business reimbursement plan, which most small sole proprietors don't, it makes little sense to take money out of one pocket to put into another when you have already incurred the trip expenses. It is usually easier to simply take those expenses as a deduction when you file the Schedule C on your Individual Tax Return.

Conversely, if you have a separate business entity such as a Partnership, Limited Liability Company, or a Corporation, and you set up an accountable business reimbursement plan, your partners or employees can report their expenses to the business entity in the same manner as an individual would to the IRS. In this case, the business entity would simply reimburse their partners or employees on a regular basis for their out of pocket costs. The individual would take no deduction on their tax returns, nor would the reimbursement be required to be reported as income.

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