A New Thought for REIs Expense Reimbursement vs Company Credit Cards
“The secret of getting ahead is getting started.” - Mark Twain
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 reimbursing expenses for employees, etc. or using a company Credit-Card. Oh, I'm going to take you down a little rabbit hole today, yes I am.
Now, let’s dive into handling business expenses paid by employees.
You gotta' spend money to make money. All real estate businesses need supplies, materials, and services to finish that flip, help finish the renovation, or a few duplicate keys for your tenant.
Depending on the nature of your business, your employees may need to make independent purchase decisions frequently. Empowering your employees to make these purchases on their own can make your business run much more efficiently. After all, do you 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
- Sheet-rock mud
- Small tools
- Small quantities of parts and materials
All of these expenses, and many others, are necessary to complete tasks required to run your business. The critical initial question: 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.
Time Savings
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 and no reimbursement checks to be cut.
But think about this: Do you need to allocate expenses to specific clients or properties? If your employees are, for example, purchasing parts and materials needed to complete a rehabilitation in Apt. 8, then those credit card charges ultimately need to be assigned to that apartment for an accurate Profit & Loss (P&L). 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 properties, then a company credit card can certainly save a lot of 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.
Trust Issues
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 wherein you don’t necessarily know each and every employee. As your business grows, you won’t have a 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 isn’t paid on items used in your 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 your 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 office.
Accountable Plans
If you choose to reimburse employees for expenses they’ve 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 or software such as HubDoc®)
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 jobs for faster invoicing, and eliminate any potential trust issues.
The trade-off? Time and convenience.
Every business has individual and unique issues. Check with your tax pro for guidance. Make a decision and move on.
BE THE ROAR not the echo®
Warmly, Janet
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