Tax law allows you to deduct two types of travel expenses
related to your business, local and what the IRS calls "away from
home".
First, local travel expenses. You can deduct local
transportation expenses incurred for business purposes, for example the cost of
getting from one location to another via public transportation, rental car, or
your own automobile. Meals and incidentals are not deductible as travel
expenses, although as you will read later in this guide, you can deduct meals
as an entertainment expense as long as certain conditions are met.
Second, you can deduct away from home travel
expenses-including meals and incidentals; however, if your employer reimburses
your travel expenses, your deductions are limited.
Local
Transportation Costs
The cost of local business transportation includes rail fare
and bus fare, as well as the costs of using and maintaining an automobile used
for business purposes. For those whose main place of business is their personal
residence, business trips from the home office and back are considered
deductible transportation and not non-deductible commuting. You generally
cannot deduct lodging and meals unless you stay away overnight. Meals may be
partially deductible as an entertainment expense.
Away
From-Home Travel Expenses
You can deduct one-half of the cost of meals (50%) and all
of the expenses of lodging incurred while traveling away from home. The IRS
also allows you to deduct 100% of your transportation expenses--as long as
business is the primary reason for your trip.
Here's a list of some deductible away-from-home travel
expenses:
Meals (limited to 50%) and lodging while traveling or once
you get to your away-from-home business destination.
The cost of having your clothes cleaned and pressed away
from home.
Costs for telephone, fax or modem usage.
Costs for secretarial services away-from-home.
The costs of transportation between job sites or to and from
hotels and terminals.
Airfare, bus fare, rail fare, and charges related to
shipping baggage or taking it with you.
The cost of bringing or sending samples or displays, and of
renting sample display rooms.
The costs of keeping and operating a car, including garaging
costs.
The cost of keeping and operating an airplane, including
hangar costs.
Transportation costs between "temporary" job sites
and hotels and restaurants.
Incidentals, including computer rentals, stenographers'
fees.
Tips related to the above.
Entertainment
Expenses
There are limits and restrictions on deducting meal and
entertainment expenses. Most are deductible at 50%, but there are a few
exceptions. Meals and entertainment must be "ordinary and necessary"
and not "lavish or extravagant" and directly related to or associated
with your business. They must also be substantiated (see below).
Your home is considered a place conducive to business. As
such, entertaining at home may be deductible providing there was business
intent and business was discussed. The amount of time that business was
discussed does not matter.
Reasonable costs for food and refreshments for year-end
parties for employees, as well as sales seminars and presentations held at your
home are 100% deductible.
If you rent a skybox or other private luxury box for more
than one event, say for the season, at the same sports arena, you generally
cannot deduct more than the price of a non-luxury box seat ticket. Count each
game or other performance as one event. Deduction for those seats is then
subject to the 50% entertainment expense limit.
If expenses for food and beverages are separately stated,
you can deduct these expenses in addition to the amounts allowable for the
skybox, subject to the requirements and limits that apply. The amounts
separately stated for food and beverages must be reasonable.
Deductions are disallowed for depreciation and upkeep of
"entertainment facilities" such as yachts, hunting lodges, fishing
camps, swimming pools, and tennis courts. Costs of entertainment provided at
such facilities are deductible subject to entertainment expense limitations.
Dues paid to country clubs or to social or golf and athletic
clubs however, are not deductible. Dues that you pay to professional and civic
organizations are deductible as long as your membership has a business purpose.
Such organizations include business leagues, trade associations, chambers of
commerce, boards of trade, and real estate boards.
Tip: To avoid problems qualifying for a deduction for
dues paid to professional or civic organizations, document the business reasons
for the membership, the contacts you make and any income generated from the
membership.
Entertainment costs, taxes, tips, cover charges, room
rentals, maids and waiters are all subject to the 50% limit on entertainment
deductions.
How Do You Prove
Expenses Are "Directly Related"?
Expenses are directly related if you can show:
There was more than a general expectation of gaining some
business benefit other than goodwill.
You conducted business during the entertainment.
Active conduct of business was your main purpose.
Record-keeping and Substantiation Requirements
Tax law requires you to keep records that will prove the
business purpose and amounts of your business travel, entertainment, and local
transportation costs. For example, each expense for lodging away from home that
is $75 or more must be supported by receipts. The receipt must show the amount,
date, place, and type of the expense.
The most frequent reason that the IRS disallows travel and
entertainment expenses is failure to show the place and business purpose of an
item. Therefore, pay special attention to these aspects of your record-keeping.
Keeping a diary or log book--and recording your
business-related activities at or close to the time the expense is incurred--is
one of the best ways to document your business expenses.
If you need help documenting business travel and
entertainment expenses, don't hesitate to call us. We'll help you set up a
system that works for you--and satisfies IRS record-keeping requirements.
