USA Client Paid Fringe Benefits

[Zac]

Hi,

I am looking for some help with my California S-corp accounting. I currently manage my own books using Wave accounting which works fine for what I am doing.

Question is, I have a client who frequently offers to pay for fringe type benefits while on travel (golf lessons, massage, spousal travel). I have tried to avoid these just due to the unknown of how to account for it and how it will impact my accounting. Currently, while on travel on the client's behalf, I invoice him for all business related expenses.

I have one trip that is impacting a previously planned vacation so it was offered to bring my significant other with. I use a reimbursed expenses account to track expenses I bill him which are fully deductible. I believe I might just create another account for non-deductible expenses and include the companion expenses in this. That way I could still invoice for them but track them separately.

Next, this is money coming into the corporation, so I then need to determine if it goes against my personal income and what I do with it.

Tried searching the net for a scenario like mine but no direction thus far. I have an accountant however I like to research this and understand it myself and yes I can ask but I feel I might get better answers and more detail here. Thanks,

-Z

 

[smallbushelp]

You should ask your own accountant because he knows your business. If you think you might get better answers from a forum (and sometimes you do) then I suspect that your accountant doesn't communicate with you very well. If that's the case, you may want to find a new accountant.

But, since you asked, here's my 3 cents worth. The picture you paint is a little fuzzy but if I understand you correctly, you work for a client and part of the job involves traveling. You bill him at the end of a project (or maybe once a month) for time and expenses - including the travel expenses. And while you're on a trip, he tells you to go ahead and take some golf lessons and he'll pay for it. So when you invoice him, you include the cost of the golf lessons and he pays the bill. Nice.

In your accounting, how do you book the cost of the golf lessons? Do you post to an expense account and a separate liability account or to accounts receivable? In your scenario, the cost of the golf lessons is a legitimate expense to your company and the reimbursement is correctly booked as income. If you're using a "reimbursed expenses" account to track the expense, you should have a corresponding income account, maybe called "reimbursement income," to offset it. Normally, expenses for golf lessons, massages and spouse travel are not legitimate business expenses. But if the client is reimbursing you for them then they become valid expenses to offset the income. I don't think you need to change your accounting by adding another account to track "non-deductible expenses."

 

[Zac]

Thanks for the reply. You are right about my accountant, not the most responsive and helpful so far.

You are correct, half of my work for the client involves travel on their behalf. I typically invoice once per month since the work flow is steady.

In wave currently I allocate the expenses to the reimbursed expenses income account directly, and then invoice to that same account for the expenses. So it ends up being a net 0 income after being paid which I agree with.

However, I think where I am confused is that you say if they are reimbursed they are legitimate. I was under the impression (from reading several of the IRS documents on expenses) that the expense had to be ordinary and necessary and even though the client was paying for it, still had to be deductible under the normal rules for me to consider it a reimbursed expense instead of income.

I will clarify this discussion with my accountant (or a new one) but if I understand you correctly, as long as it is reimbursed by the client, it is not considered income. So the travel for my spouse on my business trip would be considered a reimbursed expense and no need to seperate the expenses. Instead it is the client's responsibility to understand what is deductible for them and account for it appropriately.

 

[smallbushelp]

I'm a CPA so I'm heavily trained in generally accepted accounting principles. GAAP says that a business should not offset an expense with a reimbursement; the reimbursement is booked as income and the expense is booked as an expense. The two ultimately offset each other in the P&L so there is no tax implication but they should be reported separately. But if you're not concerned with perfect GAAP accounting, what you are doing in your accounting system is just fine. For tax purposes, I didn't say "legitimate," I said valid; valid expenses to offset the income because you shouldn't be taxed on the income. What you have there is more like a reimbursements receivable from your client. That's why I asked if you booked to a liability account or accounts receivable. You could handle all of the transactions in a liability account. That way, there is no interaction with income or expense accounts.

I asked another tax accountant that I know what she thought, and her reply was, "I’d treat it sort of like a reimbursements receivable from Joe’s client, that the client paid – or similar to a suspense account that records the ins and outs, but it doesn’t affect anything on financials – and ultimately will be zeroed out." So your way or using a liability account works.

From a tax perspective, your last statement is correct. Your client is responsible for the deductibility or non-deductibility of the business and/or entertainment expenses on his own return. He's the one who ultimately incurred the expense. And make sure that your client is not including the reimbursement portion of his payments to you on a 1099 if he sends you one.

If I was helpful, I'd appreciate a "Like". And by the way, I'm available for accounting services and tax return preparation if you're in need. Good luck.

 

[Zac]

Thanks for your help, appreciate you taking time to explain.

I operate as an s-corp so I invoice for my work and seperate the labor from reimbursed expenses, so different in my accounting and when I go to issue my W2 at year end.