Controller's Office Policy CO 07 97
Purpose: To place business entertainment expenses in proper focus, to prevent abuses, and to ensure prudent control of these expenditures.
Scope: Applies to all funds other than those funds appropriated by the State of North Carolina, which cannot be expended for these purposes under any circumstances. Applicable funds are primarily promotional accounts.
Policy: The Administration of The University of North Carolina at Pembroke recognizes that business entertainment can be essential to the operation of the University. The purpose of the entertainment must be business and not personal. No entertainment expenses can be charged to contracts and grants unless such entertainment is specifically authorized by the terms of the contract or grant.
A. Documentation Requirements
Entertainment expenditures must be documented to show the following:
1. Identification of the host and person(s) or group being entertained. If a small group (eight or fewer individuals) is being entertained, the names of all persons attending must be listed. If the group is larger than eight, indicate the identity of the group and the number of persons attending.
2. A statement of the reason for such entertainment and how the entertainment benefited the University and clarifying the relationship of the persons in attendance to the particular aspects of the University's programs or activities (titles, committee names, field of interest of person being entertained, reason for visitor being on campus, etc.).
3. The place of entertainment must be provided. Also, receipts for entertainment expenses are required for reimbursement to faculty or staff members. If payment is to be made to a vendor, the normal invoice or statement of costs is required.
Reimbursements are not to be made for entertainment expenditures unless the documentation is complete. When additional documentation is required, a request for documentation is forwarded to the individual responsible for the account. If appropriate action cannot be taken to properly document the expenditure, the individual staff or faculty member must bear the cost of the entertainment.
B. Categories of Entertainment
1. Official Guests of the University
The University is normally not expected to reimburse official guests for travel and related expenses, except where the guests travel to the University on specific invitation. However, it is recognized that entertainment of guests is essential. Examples of official guests would include the following: visiting lecturers, visitors from foreign countries, representatives of research organizations, visitors from other Universities, individuals interested in University programs and issues (potential donors), guests invited to assist in the development of new programs (both paid and non-paid consultants), and business and community leaders. The relationship between the visitor and the University staff or faculty attending the function or their areas of responsibility must be clearly indicated, particularly for those who are at the campus on specific business on behalf of the University.
2. Conferences, Workshops, Meetings, Seminars
In the case of conferences and workshops conducted by the University which are supported by income from registration fees, all entertainment expenses must be covered from the revenue produced by the event and separate records must be maintained.
3. Receptions and Dinner Meetings
Receptions for students, faculty, alumni, and friends of the University are reimbursed as entertainment. The University may, from time to time, hold dinner meetings for administrative officers, deans, department heads, and faculty, including spouses, for the purpose of discussing items of general University interest. Such meetings may be reimbursed by the University as entertainment.
C. Taxability of Business Entertainment Expenses
Business entertainment expenses are not taxable to the faculty of staff members reimbursed when the reimbursements are part of an accountable plan as defined in the Federal tax code. Business entertainment expenses are considered part of an accountable plan only if the following three conditions are satisfied:
1. there must be a business connection for the expenses;
2. the faculty or staff member must either substantiate or be deemed to have substantiated the expenses and
3. the faculty or staff member must return to the University amounts in excess of the substantiated (or deemed substantiated) expenses (expenses charged to and paid by UNCP).
Although many business entertainment expenses would be considered as part of an accountable plan, it is important to adhere to tax regulations to avoid taxability of reimbursements. "Ordinary and necessary" meal and entertainment expenses under an accountable plan will not be reported on the employee's form W-2. In order for a meal or entertainment expense to be considered "ordinary and necessary," the expense must be "directly related to" or "associated with" the active conduct of the trade or business. For example, business must be discussed during the meal and there must be an expectation of a business benefit such as the hiring of a professional candidate or the obtaining of a gift or bequest from a potential donor. Furthermore, there should be no "substantial distractions" at the site of the meal.
Business Meal Requirements
In a typical business meal situation, there will be at least one person present who is not a University employee. It is possible, however, for a University employee to entertain other University employees over a meal and have that meal qualify as a nontaxable meal eligible for University reimbursement. To be considered nontaxable, the meal in question must be considered to be an "ordinary and necessary" business expense "directly related to" or "associated with" the active conduct of a trade or business. Whether or not these requirements are met in a setting where only University employees are present requires judgment based on the facts and circumstances of each case. The courts have looked to the frequency of such meals as one factor in making this determination. For example, a group of business colleagues meeting daily for lunch to discuss bona fide business matters was not held by the courts to satisfy the necessary business requirement noted above. Thus, the fact that a lunch occurs only occasionally lends more credence to its business necessity. Whether a lunch would have occurred anyway in the same location must also be considered. If a restaurant is too expensive for the University employee's personal taste or was conducted at an inconvenient location, then the expense will most likely not be an "ordinary and necessary" one.
If all of the requirements noted above are met for business meals, the University will reimburse the cost of the meal(s) to either the faculty or staff member or to the vendor. The cost of business meals is excluded from the faculty or staff member's gross income and is not subject to withholding or payroll taxes. If the requirements are not met, the expense reimbursement is taxable to the faculty or staff member as part of a non-accountable plan.
The tax code and related regulations provide that expenses reimbursed under an accountable plan will not be reported on the faculty or staff member's form W-2; hence the faculty or staff member need not account for them on his or her tax return. Any amount considered paid under a non-accountable plan, however, must be included in the faculty or staff members' income on form W-2.