Archive for October, 2010

Under the Affordable Care Act of 2010, FSAs and other health reimbursement arrangements cannot reimburse the cost of over-the-counter (OTC) medicines or drugs that are purchased after Jan. 1, 2011 without a prescription. Medicines or drugs purchased without a prescription in 2010 can be reimbursed by FSAs in 2011, only if the employer’s plan permits it.

Exceptions to new rule: Insulin, even if purchased without a prescription, or items other than medicines and drugs available without prescriptions, such as medical devices, contact lenses and eyeglasses. Also, both deductibles and co-pays can be reimbursed from an FSA.

OTC medicine and drug purchases using FSA debit cards should be made by Dec. 31, but the IRS says it will not challenge debit card purchases made through Jan. 15, 2011. After that date, purchases of OTC items must be substantiated with a prescription.

A similar rule will go into effect on Jan. 1 for HSAs and Archer medical savings accounts, the IRS says.

The IRS recently issued guidance reflecting the changes and intends to amend other rules and regs.

If your FSA allows reimbursement of over-the-counter drugs and medicines, tell your employees with balances in their accounts that they might want to stock up on items before Dec. 31 to maximize the use of their accounts. [Notice 2010-59; 2010-39 IRB 1; IR-2010-95]

Proof of a deduction or business expense takes two legs.  Under IRS §162, Trade or business expenses, a taxpayer must prove that the expense:

• was ordinary and necessary for carrying on a trade or business; and
• was actually paid.

It is not enough to have bank statements showing checks written to office supply stores and the U.S. Post Office, but not a detailed record of items purchased and how they relate to your business. Conversely, you must have invoices showing the amount due and how these items related to the business and also proof that the invoices actually were paid.

If your record keeping is scant, you risk being denied the deduction because you cannot prove both key elements for each deduction.

Some expenses, such as travel, meals, entertainment and auto expenses, require more proof under §274, Disallowance of certain entertainment, etc., expenses. The IRS and courts have no flexibility on these items and deny deductions unless all the substantiation required by the regulations is provided. [Fleming v. Commissioner, T.C. Memo. 2010-60]

If you have questions regarding deductions and record keeping, consult your accounting professional and CPA.