USA Expense Reimbursement Date vs Tax Year

[grecocroatian]

Hi Everyone,

This is my first post and looking forward to being part of the community both as a consumer and a contributor. I'm a small business owner (just me right now) working as a software consultant in C2C arrangements. My business is filing as a C-corp and using cash-based accounting.

I would like to understand the rules in order for my company to legally deduct an expense made by an employee (in this case myself) for a given tax year, whereby the expense is made from personal funds and reimbursed to me by company.

I'm using a 3rd party service to carry out the transfer of funds from my business account to my personal account for reimbursements. The problem is that this company is slow to carry out the transfer. For example, if I approve a reimbursement on Dec 25th, it might not be physically withdrawn from my bank account until Jan 1st. But as I need the expense to be deductible in the current tax year, I'm not sure if this will pose a legal challenge if I'm audited. Some people suggest writing a physical check, in which case, the check date is the honored date. But can the reimbursement date of an online service be considered the "honored" tax year date even if the transfer of funds falls into the next year by a few days?

Thank You,
Nicholas

 

[MoralesTax]

Hi Nicholas,

The time between when you authorize a transfer and when the transfer posts between banks is known as "float". At times, this float time can be confusing, as you are finding out, but it does not have to be so. The mere fact that you mentioned how physical checks work is exactly the sort of treatment you need to apply towards these transfers.

Therefore, the day you approve a reimbursement is the day of the expense. The transaction is then posted on your business' books on that date, reflected as an outstanding transaction. You later reconcile it on the following month's bank statements, once it is posted. To your previous point, this is very similar to back-dating a check. This is common practice for cash-basis accounting entities and you would have little difficulty protecting this position, if audited.

Where you could run into a snag is if you pay yourself only in this way. You are acting in the capacity of an employee for the business and should draw a salary, as such. Otherwise, the IRS could claim those reimbursements are in fact your salary and we could go down a whole different rabbit hole.