Travel and Entertainment: Maximizing the Tax Benefits
Don't overpay your income taxes by overlooking expenses that you are entitled to deduct. Use this Quick Guide to ensure you are handling your business travel and meal costs in a tax-wise manner.
This Unofficial guide shows you how to take advantage of all of the travel and entertainment expenses you're legally entitled to and offers guidance on which expenses are deductible and what percentage of them you can deduct. It also discusses the importance of following IRS rules for keeping records and substantiating your expenses in order to avoid an audit.
Travel Expenses
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, 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.
AWAY FROM-HOME TRAVEL EXPENSES
You can deduct one-half of the cost of meals (50 percent) and all of the expenses of lodging incurred while traveling away from home. The IRS also allows you to deduct 100 percent 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 percent) 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.
Meal and Entertainment Expenses
Prior to tax reform, there were limits and restrictions on deducting meal and entertainment expenses, with most deductible at 50 percent. Under tax reform, there were a number of changes, the most notable being that entertainment expenses paid or incurred after December 31, 2017, are not deductible unless they fall under specific exceptions, for example, expenses incurred for social activities primarily for the benefit of your employees. As such, reasonable costs for food and refreshments for year-end parties for employees are 100 percent deductible.
Meal costs must be "ordinary and necessary" and not "lavish or extravagant" and directly related to or associated with your business. They must also be substantiated.
Recordkeeping 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.
Which Records you should keep?
You must substantiate the following business expenses:
Travel expenses while away from home (including meals and lodging).
Business meals and entertainment if allowed under a tax code exception, and
Business gifts.
To substantiate these items, you must prove:
The amount.
The time and place of the travel, entertainment, or recreation, or the date and a description of the business gift.
The business purpose, and
The business relationship of the recipient of entertainment or gifts.
The most frequent reason for IRS's disallowance of travel and entertainment expenses is the 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 logbook 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.
Employees "Fully Reimbursed"
Employees who are "fully reimbursed" by their employer must:
Adequately account to their employer.
Receive full reimbursement.
Return any excess reimbursement.
As a fully reimbursed employee, you must adequately account to your employer by means of an expense account statement. If you are covered by (and follow) an "accountable plan," and your reimbursements don't exceed your expenses, you won't have to report the reimbursements as gross income. Some per diem arrangements (by which you receive a flat amount per day) and mileage allowances can avoid detailed expense accounting to the employer, but proof of time, place, and business purpose is still required.
Recordkeeping. Tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use.
Don't forget to deduct the interest you pay to finance a business-use car if you're self-employed.
How MERCURY help?
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