Business or Personal: 7 Tips to Deducting Travel Expenses
Mixing work and play doesn't have to be a tabooed affair for entrepreneurs or their employees. But just exactly how much of what happens in Vegas can be written off? From airfare, to charges related to lodging, eating and the like, knowing how to properly separate business and personal expenses charged during business trips can be the difference between a tax deduction and a visit from an auditor.
"It's fairly common for small business owners to be unaware of the rules for handling business travel," says Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants. "They're focused on their business and getting revenue and paying they're employees; they're not tax experts."
Nevertheless, that doesn't excuse you from the responsibility of filing proper tax deductions come tax time. Here are seven tips to help you navigate the foggy line between tax write-offs and business travel:
1. Hire a knowledgeable CPA.
What's the difference between a personal- and business-related expense? The answer isn't always easy. "It's an expense directly related to your business activity," Ochsenschlager says. "Now what is directly related and what is not? That's when you get into the weeds a little bit about what some people think is directly related, but the IRS may not necessarily agree," which is why he strongly suggests that entrepreneurs enlist the services of a knowledgeable Certified Public Accountant (CPA). The CPA must be up-to-date on IRS rules, understand your business and processes to handle not only financial statements, but for tax purposes as well. "CPA's do know these rules that are pretty archaic and some of these things are not common knowledge."
2. Know the tax deduction loopholes.
Most employers are familiar with the expense rule that only 50 percent of costs of their meals are deductible; however, few realize that that's not always true, says Ochsenschlager. "When the meal is offered as a benefit to the public such as an outdoor food festival or an event where the business is promoting itself (think sponsorship and an advertising expense), then the cost of the meal is fully deductible by the company." Another exception to the rules: some airlines offer discounts for traveling on a Saturday. Dubbed the "Saturday night stay," this means you can charge an extra night even if it's personal, but only in the event that the total costs are cheaper than flying on a Friday.
3. Use separate lines of credit.
Marty Metro, founder and CEO of UsedCardboardBoxes.com, an online retailer offering quality, used boxes to corporate and residential clients, says his wife often travels with him on business trips. "From using the right card to eating when my wife is with me," Metro admits, things can get a little tricky. He uses a personal credit card for personal items like his wife's expenses and the corporate card for business items like dining with business partners or purchasing supplies for workers. Metro's hotel stay and transportation are fully deductible even when his wife tags along, because he'd need a room (a single) and transportation anyway. But if they were to take public transportation during his business travel, he would be able to deduct only his fare; his wife would be responsible for any transportation costs she would incur alone. And if he were to upgrade to a double room in order to accommodate his wife, then he would be responsible for the difference in price. Travel expenses for someone such as a spouse, family member or a dependent accompanying you on a business trip cannot be deducted unless the person meets all three of the following criteria (set by the IRS in it's annual publication Travel, Entertainment, Gift, and Car Expenses): (1)is your employee; (2)has a real business purpose for the travel (incidental services like taking notes aren't enough); and(3)would otherwise be allowed to deduct the travel expenses.
4. Keep orderly records and label receipts.
Mark Carson, co-founder and CEO of Fat Brain Toys, the Elkhorn, Nebraska-based online retailer of nearly 5,000 specialty games, toys and gifts, stresses the importance of keeping adequate records of travel expenses. "We manage by retaining receipts, which we submit to our in-house accountant who does the day-to-day, journal entries and processes checks," says Carson. "Then we have another accountant that handles the larger matters such as yearly and monthly statements." Metro agrees: "We record every single expense, save every single receipt, and categorize everything, and then we sit down with the CPA to make sure that the right expenses are being deducted." Among the business travel expenses that are deductible: Air, rail and bus fares; baggage charges; cleaning and laundry expenses; computer rental fees; car expenses; hotel expenses; public stenographer or clerical fees and telephone or fax expenses.
5. Give employees a travel per diem.
Ochsenschlager suggests that setting a travel per diem can simplify record keeping. "Let the employees charge a per diem when they're traveling," he says. The government's standard allowance varies area-to-area, but the U.S. General Services Administration offers a complete list on its website. "The advantage is that you don't have to reimburse an employee anymore than the per diem amounts, leaving it up to the employee to determine how to allocate things. All you have to do is keep track of the number of days they're on business."
6. Separate work and personal activities.
If your trip is partially business and partially personal, the amount you can deduct will depend on how much time you actually spend on business, according to the book, The Complete Idiot's Guide to Tax Breaks and Deductions by Lita Epstein. "After a recent trip to London, I decided to visit a girlfriend in Paris," recalls Renee Ryan, founder and CEO of two New York City companies—cosmetics consulting firm, Ryan Basics, as well as Sexy Beast, a luxury pet brand that produces products and accessories. "Therefore, all my expenses in London as well as my airline ticket from New York to London and from Paris to New York were business expenses. However my flight from London to Paris and everything I did in Paris was considered personal." Ryan says she has no qualms when those on her three-person team tack mini-vacations on to their business trips, especially when they get to travel internationally or to LA and Miami; everyone is held responsible for the portions of their trip that are not business-related.
7. Mandate that employees turn in timely expense reports.
Before any travel takes place, Ryan says she sits down with the employee to discuss the approximate trip budget and urges them to turn in timely expense reports for reimbursement rather than turning in a bunch at once. Abraham Schneier, Technical Manager for the American Institute of Certified Public Accountants, asserts that this step is necessary for an employer to stay on top of things when business and personal overlap. "The business owner needs to make sure expense reports are turned in on a regular basis and not lingering for two to three months, which could mess up the company's financials and even cash flow," says Schnier. "So make prompt submission a requirement of employees. And implement a plan that's really enforceable because its one thing for the employees to accrue those expenses and get reimbursed but it's the employer's tax return that's at risk if something doesn't comply with IRS rules."
Having travel guidelines and policies in place, are a must for small business owners. "What you don't want is for your employees to accrue expenses that they think they won't be responsible for and they find out that they are or better yet, you are," says Ochsenschlager. "So you want to make it very clear to your employees what you're going to reimburse them for versus what is their responsibility so that they aren't any unpleasant surprises."