This past weekend I attended the ResellingDO hosted by Trevor at TaggingMiles. It was a great event, with lots of great people, other than Mileswhip. One of the thoughts that struck me during dinner was how paying for such an event has changed for me over the years, and ironically, how I’ve reverted back to what I might have done before I knew about business taxes. The difference, an underlying foundation of knowledge that makes two things that look the same, be very different.
Paid for dinner with CSP
Got tired of reimbursing CSP and paid with Ink
Established accountable plan with S Corp
Paid for dinner with CSP— Saverocity (@Saverocity) September 12, 2016
Phase 1
Here’s my evolution of payment. Back in the day I’d pay for dinner with a points earning card, like the CSP. We’re conditioned to reach for it for dining and travel expenses.
Phase 2
Phase two of my evolution comes from automation. Dinner often doesn’t cost all that much, so the difference between paying for it with a CSP and an Ink is probably 30-50 (or less) Ultimate Reward Points. So going from the ‘best’ (at the time) option for paying to ‘the worst’ (or one of them) is trivial at best. However, paying with an Ink card is superior in that the automation channel is cleaner:
Business Expenses >> Business Credit Card >> paid in full with Business Checking
Suddenly, the CSP seems like a bad idea, because all that record keeping and reimbursement is less efficient than using proper business tools to manage your expenses.
Phase 3
Phase 3 of my evolution comes from knowledge and foundation. By layering two elections on the business at the foundation level:
- S Corp Election
- Accountable Plan adoption
Reimbursements become a lot easier all round. While not necessarily essential for Per Diem elections, being the employee of the company (Via S Corp) and being able to reimburse that employee monthly via an Accountable plan makes it a very clean system to use.
In phase 3 I stop using the Ink and start using the CSP again. I actually don’t want my business bank automation channel to autopay expenses for meals and incidentals, because that efficiency causes complications. I actually want to be a bit more sloppy, because that allows my Framework™ to pick up the slack.
Per Diem rates are established by Government employees, and can be used (if established correctly) by small business to streamline accounting. The Per Diem Tables are found here, and note that international Per Diems can be very generous.
For Maryland, where I was for my business trip, the lookup table is below:
A couple of rules
If you are the owner of the company you can’t use the lodging Per Diem rates, you have to use actual cost. For me that was 3000 SPG and a coupon for the classiest Radisson in town. You can however, use the M&IE column.
Days of travel require a reduction in Per Diem to 75% of the day. For example, I flew in Saturday, attended a conference on Sunday, flew out Monday, two of the three days are considered ‘day of travel’.
- Saturday $59 (Baltimore) *75% = $44.25
- Sunday $59
- Monday $44.25
What I’m doing here is electing to use these amounts as my food cost for the trip. If I were to have used my Ink at dinner last night, the company would reimburse that amount directly (via autopay). If it was say, $19.44 for the dinner I’d then have to back that out of the $59 allowance and reimburse the balance to top it up. A mess. Instead, I just used the trusty CSP.
Also, if you are reimbursing under an Accountable plan there are strict rules governing the timing of the reimbursements to the employee.
Conclusion
I find it interesting that from outward appearance I’ve gone full circle, from using the CSP, to using an Ink, to using a CSP again, but while there could have been two (or likely much more with this group..) using a CSP to pay for our meals during this event, I wonder how many are using the Per Diem tables and reimbursing themselves as employees of an S Corp under an accountable plan?
It’s another example of Teh Framework™ in action. Two things that look the same, and perhaps even look dumb to the ‘somewhat educated’ observer using the Ink card are very different.
If you have any questions about what or how to deduct business expenses feel free to ask in the comments, just remember that it isn’t formal tax advice or financial advice if you aren’t a client, but I might be able to help steer you in the right direction.
It was good to see you at the Do, Matt. Keep on churning these thought-provoking posts. There are a few things that are lost on me, however.
1. What is the advantage of the much more complicated S Corp setup vs a simple DBA when it comes to deducting business expenses? I know there are other advantages of incorporating, but is this one of them?
2. I get the sense people *really* value deductible expenses. And I don’t understand why. When you’re the owner of the company, it’s still coming out of your pocket. Fewer taxes is nice and all, but I’d rather not have those expenses in the first place.
Good seeing you too Mark.
1. the S Corp really isn’t complicated. But regardless, the big difference is that you can be considered an employee of the company and the owner of the company. Employee side you can reimburse (tax free) which is powerful. Owner side you can pass revenue without self employment tax.
2. Per Diems aren’t coming out of your pocket… they are a way to take money out of the business without tax. We’re all at that DO on Sunday, and I can pull $140 out of the company for meals, tax free…
Every month, there are several things like this that allow me to withdraw thousands each year (not actually spending the money, just withdrawing it)
It’s very useful.
In general, are there really no tax implications to and employee taking a per diem in excess of actual M&I costs to the employee?
Is this only true if using the government set per diem rates?
Is this also true of lodging rates (assuming the employee is not an owner)?
It just seems a bit shady for an employee to, for example, claim the SFO lodging rate of $250 plus $74 for meals, and then eat ramen and sleep in the back of a rented Suburban..
How is it any different than using the mileage deduction?
Is it true that with an S corp you have to pay yourself and income and then the rest as a dividend. How does that benefit if you have an actual job. Isn’t your taxes going to be higher cause your getting double income
1. No it is not true. Though you really will want to do this once you hit that level of business income. The not true part is that you have to pay a dividend. You do have to pay a salary, and the dividend is optional (and desirable).
2. No. You’re getting extra income, which increases your taxes and you are finding a more efficient way to deal with it. If you use an S Corp, Accountable Plan and retirement accounts for your ‘non actual’ job you’ll save a lot on taxes.
Thanks Matt. I will have to look into this further, although I wonder what’s the lowest salary I can get away with 🙂