More About Expense Reimbursements

June,

I am a historic preservation consultant in Chicago, just beginning my practice as an LLC.

I understand from past work in the IT field that some service providers separate client payment for work done from reimbursements for travel and expenses. The contract would specify that the client reimburses directly for T&E. I'm assuming the result of this is to clearly limit income to dollars paid for actual work done (I would not count the reimbursement of travel expenses as income). To avoid submitting detailed expense reports to my clients for reimbursement, I would prefer to roll T&E into my total estimate, rather than keep it separate. What are the benefits / drawbacks to taking either approach? I anticipate perhaps half of my work (say six projects a year) requiring up to four separate overnight stays in order to complete each project.

Thanks!
Nick



Dear Nick,

First let's take a look at reimbursements in general. Whether or not the payer includes reimbursed expenses on your 1099-MISC your income is the same.

Here's an example:
$5,000 fee + $1,000 supplies bought for a client for which you are reimbursed by the client = $6,000 you receive from the client.

A 1099 stating $5,000 income means you claim the $5,000 as income and do not deduct the $1,000 expenses on your return.

If the client gives you a 1099 stating $6,000 income you claim the full $6,000 in income and you deduct the $1,000 supplies on your tax return which brings your fee income to $5,000.

In your situation, whether to choose reimbursement or a higher fee will take some calculation on your part. If the payer reimburses you dollar for dollar there is no tax difference in either method. If you pay $1,000 in travel expenses and are reimbursed $1,000, the only difference is in the amount of paperwork.

On the other hand, if you are reimbursed at 60 cents per mile for auto use and your calculations of actual auto expense come out higher than that then it would be better to raise your fee to include your higher cost rather than receive reimbursement at a per mileage rate.

If you are reimbursed for less than your cost you would pay less tax than if you were reimbursed for more than your cost.

I have two caveats to what I just said.

The first is about meals & entertainment expenses. If you spend $100 on a meal for which the payer reimburses you and included the papyment on your 1099 you may deduct the entire $100 as a deduction on your tax return. Read this post to understand how and why: Reimbursed Expenses Included on a 1099 .

However, if you choose to instead up your fee by $100 and deduct the meal on your tax return, the deduction for that meal on your tax return is only $50.

The second caveat relates to state gross receipts tax. In some states you must pay a tax on your gross income. Payment for reimbursed expenses that are included on 1099s complicates the state tax reporting procedures and also may increase the amount of gross receipts tax you must pay.

Be sure to read all the posts on reimbursed expenses here expenses -- reimbursed .

Best, June