If you’re a bookkeeper, accountant or manager in a nonprofit, you have probably felt the frustration of getting employees to submit their expense reports and receipts for travel and meal expenses.
But you also know that it’s important.
In fact, it’s essential to follow nonprofit travel and expense policy best practices to make your life easier, while still meeting your responsibilities to donors and the IRS.
As a public charity, your donors trust that you’re a good steward of charitable funds, spending their contributions prudently in the execution of your mission.
Furthermore, nonprofits, like other entities, can get into trouble with the IRS if they don’t follow proper procedures with regard to meals and travel expenses.
The IRS guidelines and nonprofit travel and expense policy tips below are designed to help you shape a more effective policy in your own organization.
Nonprofit travel & expense policy guidelines
The guidelines below pertain to situations where employees are reimbursed after using their personal money for legitimate organizational expenses, as well as using the organization’s credit card to make purchases.
Legitimate purchases, if properly documented, are considered costs of the nonprofit organization that are not taxable to the employee.
You must have a written record to corroborate the expenses. Note that a record prepared on a computer counts as a written record.
In Publication 463, the IRS identifies two elements of this written record:
1. Detailed Expense Reports
According to the IRS, “you should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record.”
This is typically done by collecting expense reports from your employees.
In the past, this was accomplished with pre-printed forms that employees would complete by hand. Then came Excel-spreadsheet versions of expense reports to complete on computers, print, and sign.
Nowadays, many nonprofit organizations have adopted expense-reporting software, such as Expensify.
Whether your organization is low tech or high tech, the requirements are the same. Expense reports should include:
- The date(s) expenses were incurred
- The destination/location
- The business purpose
- The people involved
As auditors, we notice that “business purpose” is the one component that is often missed in the paper trail.
2. Keep documentary evidence
The IRS also says that “you should also keep documentary evidence that, together with your [expense report] record, will support each element of an expense.”
Documentary evidence typically includes a detailed receipt or invoice.
Remember, it’s not either the first element or the second element. Both are required.
Together, they should show exactly what was purchased, where it was purchased, for whom, and why.
Nonprofit travel and meal expenses: Request itemized receipts
For travel and meals, the IRS points out that the documentary evidence must be “adequate”.
Hotels bills must show the dates of stay and itemize lodging, food, and other charges. Restaurant charges should include the number of people served.
When you dine at a restaurant, the restaurant customarily provides two different receipts:
- An itemized receipt that shows what was purchased, and
- A credit card slip that merely shows the total charged to the diner’s credit card.
To comply with IRS guidelines, organizations should require that employees submit the itemized receipt.
Itemized receipts are important because they can reveal inappropriate purchases e.g. those that violate a grant agreement or organizational policy (including excessive alcohol consumption), or highlight fraud (gift card purchases, souvenirs /gift shop purchases, etc.).
Itemized receipts mean you’re better prepared in the event of an IRS audit, and also allow your organization to better judge the appropriateness of expenses incurred.
When receipts are not required
The IRS does not require receipts for out-of-town travel if you have properly adopted a per diem allowance method*, or for non-lodging expenses below $75; or when you have a transportation expense for which a receipt isn’t readily available.
However, in the interest of good internal control, many organizations have established a lower threshold for requiring receipts.
*Per diems are flat-rate reimbursements that you can pay to your employees for legitimate business travel. Although a per diem plan can be a good way to reduce some of the paperwork involved with expense reporting, they must be well-thought-out and implemented in accordance with federal guidelines and rates. Publication 463 should be your first point of reference if you’re thinking of establishing a per diem plan.
Other costs to nonprofit organizations for weak travel and expense practices
If an employee does not properly substantiate expenses for which they are reimbursed or advanced, such expenses may be taxable to the employee as wages on their W2.
For nonprofits, things can get even thornier because the amounts may end up constituting “excess benefit transactions”, i.e. situations where employees are compensated more than the value of the services they provide, which can get you into hot water with the IRS.
In closing, we would like to remind you that we’ve only provided a cursory overview of some of the many considerations when dealing with nonprofit travel and expense policies.
For further information, please read IRS Publication 463 or contact your tax advisor.
