Discussion:Reimbursable Expenses - pass-through treatment?

Currently he is doing consulting work for a BANK. The BANK PAYS THE RATE + REIMBURSES THE ACTUAL TRAVEL EXPENSES that my client incurs.

Below is the PAYMENT flow...

BANK -> MY CLIENT'S CORP -> W2 to my CLIENT.

The expenses add up to $45k a year. These expenses were reimbursed under ACCOUNTABLE plan and my client submitted all receipts.

How should my client treat these 'EXPENSE reimbursements'? My feeling is that it is just a PASS THROUGH ITEM (not an INCOME/EXPENSE item) and should not be counted towards GROSS.

For example.

The BANK PAID $200K for consulting services + $45k for expense reimbursements (TOTAL $245K).

Since the bank is already 'accounting' for $45k in expenses, can my client simply claim $200k in gross for his own corporation and pass $45k to his personal account (since he paid for those expenses with his own credit card and is being reimbursed for actual expenses under accountable plan).

My colleague is saying that he should include $245k as a gross in a corporation and deduct $45k as expense. However, I feel doing this is NOT CORRECT since it will be 'double counting' of expenses (since the bank is already taking a deduction for those expenses). Furthermore, it would increase the TRUE GROSS INCOME (by adding a non-income items -> expenses)... This sound shady like Enron or Worldcom...

Can you guys provide some expert guidance on this subject?

That being the case, your treating the travel expenses as a passthrough item, would be preferable. Presmuably the bank will take the hit for not deducting the 50% of meals.

Thanks for your reply. I agree that NET TAXABLE INCOME would be the same under either treatment. My main question is: Which is the correct way of doing this? or both of them are correct and it up to my client to decide.

1. Expenses are advanced: Debit Cost Advanced(an asset account)45K, Credit Officer Loan 45K

2. A billing is done: Debit Accounts Receivable 245,000, Credit Sales 200,000, Credit Costs advanced 45,000

3. Check is received: Debit Cash 245K, Credit A/R 245K

4. Office is repair: Debit Officer Loan, Credit cash for the 45K

You could also run the first entry thru the expense account, and then when billing is done, put 200K in AR and 45K in cost advanced, crediting that 45K to expense.

This is all internal bookkeeping but the sales of the company should be 200K.....and if he is billing the bank for actual costs, including meals on an actual basis, it would seem the bank would be the one to lose the 50% disallowance.

Thanks for your reply. For the 1120 return, client's corporation should show only 200k in Gross Sales. Correct? Furthermore, I think that this is the only right way to do this correctly - because otherwise, the bank would get hit for 50% M&E disallowance and then my client's corp would get hit second time for 50% M&E disallowance.

Can you please comment on 'considering the fact that he is using his own credit card (consider getting a company one):'... I am suggesting that the client use his OWN CREDIT CARD and then have his CORPORATION reimburse him for the same amount that it receives from the BANK (actual expenses).

The reimbursements are gross income to the contractor.

Now, let's assume that for some reason the expenses are actually the bank's, e.g., maybe the consultant got really good rates to bring the bank's employees into the main branch from around the United States. In that case, the consultant would report only the $200k as gross income and run the other "costs" through an advance account as D&T suggested.

IRS did not adjust the meals that she expensed to the clients....her contract called for the reimbursement of her travel costs which would be itemized and receipted. This does not mean that this audit formed any precedent; in fact the auditor and his manager totally ignored the fact that she filed on a February 28th fiscal, but they were there three days, the first to set the parameters, the second to examine records and the third (with the manager) for follow-up. The only real issue was the loan to the officer.