Per diem allowance and expenses mess

I’ve gotten myself into a corner. Searched the guides and forum and still dazed and confused.

Newish sole proprietor business in USA with a sadly inadequate understanding of accounting principles. My contract with client provided for federal Meals & Incidental Expenses (M&IE) per diem allowances. I paid for meals using business credit card. I’ve gleaned from my research that it would have been better to pay with personal funds and set it up as expense claims, but what’s done is done. The invoice to client contains the per diem allowances as a billable expense. But now I have the credit card expenses to categorize. I am not sure how to reconcile this “double entry” and still preserve the original invoice, which needs to show line items that cite the M&IE allowances outlined in the contract.

I’m not sure where to turn. From my reading in the guides for journal entries and credit notes, neither seems to fit this situation, but that could simply be because of my poor grasp of accounting principles.

Come on out of the corner. This situation is fairly easy to handle. It isn’t covered explicitly in the Guides because it is related more to IRS (or other tax authority) rules than accounting principles.

First, I assume you have entered the M&IE allowances as expense claims posted to Billable expenses, since no money actually changed hands.

Second, it is perfectly acceptable to charge these meals on your business credit card. They are, after all, allowable business expenses. You just have to solve the problem of entering two different ways of claiming the same deduction.

Third, the way to avoid that problem of recording the expense twice is to allocate the meal payments on the credit card (not the payment of the credit card statement) to your owner’s equity or capital account, depending on how your equity accounting is set up on your chart of accounts. That way, they are effectively withdrawals of capital. In other words, the company bought you dinner instead of paying out some share of earnings.

Fourth, when paying the credit card statement, use an inter account transfer. You are just moving money from one pocket to another. The expense itself was recorded as a draw in the previous step.

As a side note, the M&IE allowance will not show up on your books as an expense after you invoice it to the customer. It will be passed through. I won’t presume to offer tax advice. But be aware there are some complex rules about reporting meal expenses that depend on your customer correctly submitting the 1099. Many customers are unaware of these. The result can be over-reporting of income. Consult your tax advisor for more information.

Out of the corner and the dunce cap off!

First, I assume you have entered the M&IE allowances as expense claims posted to Billable expenses, since no money actually changed hands.

Correct

allocate the meal payments on the credit card ( not the payment of the credit card statement) to your owner’s equity or capital account

Makes good sense. Works for me!

the company bought you dinner

How thoughtful of the company. I’ll have to thank the company manager for that.

when paying the credit card statement, use an inter account transfer

Yes, this has been my practice and remains clear to me in this instance.

be aware there are some complex rules about reporting meal expenses that depend on your customer correctly submitting the 1099

Indeed I am aware of these nuances and clarify this issue with every new client. Been down that road, and for more than meals…reimbursed hotel, transportation, the works. Did not enjoy paying taxes on those items because the client treated them as income to me.

Many appreciations to you for providing the roadmap out of the dead end. (Apologies for mixing my metaphors.)

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@HeritageArts- If one has created “expense claims posted to Billable expenses” then the remainder of the suggested solution doesn’t address any Expense Claims account balance, perhaps it would be easier.

Create an Expense Claims Payer as M&IE Allowances so as to keep separate other expense claims.
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Create the M&IE Billable Expense via an Expense Claim, say with a daily rate of 15.00.
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The Customer gets Invoiced for the Billable Expense
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“The way to avoid that problem of recording the expense twice” is for the Credit Card charge for the actual expense incurred, say 10.00, gets allocated to the Expense Claims > M&IE Allowance sub-account as it’s a part payment towards the Expense Claim.
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At this point, all these postings have been business transactions, so there is no involvement required of any BS > Equity accounts, and nor should there be as there has been no personal transactions - even for a sole proprietor. Also at this point, the business is making a “profit” (5.00) from the Billable Expense > M&IE Allowance - as the business has invoiced more than it’s cost - so that “profit” becomes business Misc Income, and conversely any “loss” becomes business Misc Expense.

To keep things simple, you would let the Expense Claims > M&IE Allowances sub-account balance to run for the financial year and clear it out once on year end as it may swing between profit and loss throughout the year.

@HeritageArts, understand that @Brucanna’s recommendation is just another way of accomplishing the same thing I described previously. If you do things that way, however, there is no real reason for creating a fictitious M&IE expense claims payer, because you already have yourself set up as one, either because of a capital account or as a result of defining yourself explicitly as an expense claims payer. It is not necessary to have a separate payer just for M&IE claims.

The statement that “…there is no involvement required of any BS > Equity accounts…” is somewhat misleading. All @Brucanna is having you do is put off clearing of the Expense claims account until the end of the year. But you still need to clear it. The fact is, you can clear expense claims as frequently or infrequently as you want with either approach outlined.

@Tut - Your attacks on another user’s post is just unprofessional conduct especially when you are attempting to disguise/hide the failings of your own previously flawed response with nit picking garbage - which I will clarify with:

NO IT IS NOT, your previously described failed, repeat, failed to contain anything about clearing the Expense Claims account balance. So that is a KEY point of difference.

YES THERE IS, as the M&IE Allowance is not a real person, nor does it represent a person.
It represents the “federal Meals & Incidental Expenses (M&IE) per diem allowances”.
The Expense Claim (in this topic) is just the transaction vehicle being used to artificially create the Billable Expense obligations within the accounts. Equally, a business could have used a General Journal to create the exact same non-artificial Billable Expense obligations and a General Journal is certainly not a PERSON - i.e. not an Expense Claims Payer.

In fact, it would have been more accurate based on your own comment “since no money actually changed hands” to use a General Journal, as using an Expense Claim implies that a “person” has actually spent their own money first and is seeking reimbursement, which is not the case.

Furthermore, as in the above explained case, the company is paying any costs via a business credit card, so at no time is there any actual person’s private money being spent, therefore it’s probably inaccurate to use the Expense Claims concept altogether.

NO IT’S NOT. Clearly you haven’t understood what was written.

So to repeat “so that “profit” becomes business Misc Income, and conversely any “loss” becomes business Misc Expense” . That is - Misc Income and Misc Expense are P&L accounts and have NOTHING to do with BS > Equity accounts.

YES, (we agree on something), but the clearing is to the P&L not the BS > Equity accounts.
AS I clearly stated previously, all the recordable transactions are business transactions:

  1. creation of the Billable Expense
  2. invoicing the Billable Expense
  3. paying any associated costs via a business credit card
  4. clearing of any M&IE Allowances balance to the P&L

Therefore there is absolutely no requirement at all for any involvement of personal or equity accounts.