Specific rules about which travel and entertainment expenses are deductable can make complying with the tax code seem like working through a giant hairball. But take a deep breath and get ready to hunker down, because these expenses are some of the most important for small businesses. "It's a very common expense for small business owners to incur, and the rules are very specific," explains Barbara Weltman, a tax and law expert and the author of JK Lasser's Small Business Tax Guide. "If you don't follow the rules, you can miss out on getting deductions for legitimate expenses." The following pages explain how to avoid missing out on deductions both now and in the event of an audit.
How to Write Off T&E: Business Travel Expenses
If your business requires that you are away from home long enough to stay overnight, you are eligible for tax deductions related to this travel. For tax purposes, your home is your regular place of business, regardless of where you live. So if you work between Monday and Friday every week in New York, but fly home to Florida to be with your family on weekends, travel expenses like lodging and food in New York are not deductable. Still not sure where your tax home is? Find out.
Assuming that you were away from your tax home long enough to stay overnight, you are allowed to deduct the following travel expenses (note that some rules for international travel are different):
1. Planes, trains, and automobiles: You don't need to choose the cheapest option available in order to deduct transportation. You do, however, need to choose an appropriate option. First class is generally permissible, but you won't get away with deducting a two-week cruise you took en route to a meeting. Nor will you get away with writing off a ticket purchased with frequent flier miles that cost you nothing.
2. Meals: Fifty percent of the cost of meals related to travel are deductable. This includes tip and tax. If you are taking a client to dinner, you will need to document what business you discussed at the meal in order to pass an audit.
As an alternative to documenting the exact cost of meals, the IRS offers the option to deduct a set amount for meals per day. At the end of 2009, the standard meal deduction for most cities in the United States was $46 per day. This isn't an option for travel outside of the continental United States.
3. Lodging. Deduct 50 percent of your lodging expenses for any business trip that is long enough to require an overnight stay. If you bring a spouse or partner who doesn't have a business reason to be with you, legally you can only deduct the cost of the room you would pay for if traveling alone.
4. Other expenses, including:
• Transportation between the airport and your hotel, between the hotel and the work location of your clients, and between your hotel and temporary work location. If this travel includes use of your car, you
can deduct business-related mileage, tolls, and parking as well.
• Shipping baggage and sample or display material between your regular and temporary work locations.
• Dry cleaning and laundry
• Business calls
You are not, however, allowed to deduct the following:
1. Cruises and family vacations. Trying to write off your personal vacation as a business expense isn't worth the risk. "You have to recognize that travel and entertainment is a highly suspect area," Weltman says. "It's an area that the IRS is on the lookout for because of the potential of crossing the line a little bit and claiming business write-offs for what are really personal expenses. You can assume that if you get audited the IRS is going to look very closely at this area, so you want to make sure you do things right. "
It's acceptable to deduct up to $2,000 for conventions directly related to your trade that are held on U.S. cruise ships. However, you'll need to submit a written statement that includes the number of days of the trip, the number of hours each day that you devoted to scheduled business activities, and a program of the scheduled business activities of the meeting to the IRS. You will also need an officer of the group that is sponsoring the meeting to submit a statement detailing business activities that took place and the number of hours that you attended them.
2. Personal extensions to business trips. If your trip was primarily for business but while at your business destination you extended your stay for a vacation, made a personal side trip, brought your spouse or children, or did other personal activities, you can deduct your business-related travel expenses only. The amount that you can deduct, however, does include the cost of travel to and from the destination—as long as the trip was primarily for business reasons (In other words, you can prove the motivation for taking the trip was business. This is generally easier to do if more days are spent on business than pleasure).
3. Meals purchased on a business trip that is not long enough to need to stop for sleep. If you don't stay overnight, meals aren't a travel expense.
4. "Lavish or extravagant" meals. Nobody really agrees on what this means. There is no set dollar amount, but use reason when deciding if a fancy meal is appropriate for the situation.
5. Your daily commute. Transportation to and from your office is considered a personal expense.
Dig Deeper: Travel Tax Deductions
How to Write Off T&E: Entertainment
Like meals and lodging while traveling, entertainment for business purposes is 50 percent deductable. You can consider your entertainment expenses to be for business purposes if they are either "directly related to" or "associated" with your business. "Directly related" means that the main purpose of the entertainment activity was the conduct of business, that the entertainment was conducted in a business setting (like a hospitality room), that business was actually conducted during the activity, and that you expected to either make money or achieve another business purpose from the meeting. "Associated" means that the entertainment was associated with the conduct of business. Generally, if it takes place during the same day as an extensive business discussion, it fits into this category and is deductable. "You're not necessarily expected to talk business during a show," Weltman says. "But you're expected to have discussed business before or after."
Assuming that they are either directly related to or associated with your business, you are allowed to deduct the following activities:
1. Dues to civic organizations like the chamber of commerce or a professional organization.
2. Meals. You are allowed to deduct the cost of spouses' meals only if there is a clear business purpose to do so. For instance, if you invite a customer who is visiting from out of town to dinner and it would be impractical not to invite his or her spouse, you can deduct the cost for the spouses' meal as well.
3. Tickets. Only the face value can be deducted. Service charges and fees are not deductable. If you purchase a luxury box for multiple events, only the cost of a non-luxury ticket per person can be deducted.
You are not, however, allowed to deduct the following:
1. Dues to country clubs and other social organizations.
2. Upkeep of entertainment facilities.
3. Meals that you have already deducted as a travel expense.
4. Non-business guests at entertainment events. If you host a party and invite six business guests and four friends, only sixty percent of the cost of the party is deductable.
Dig Deeper: Deducting Business Entertainment Expenses
How to Write Off T&E: Keeping Track of Travel and Entertainment
When traveling or entertaining for business purposes, it's important to document everything. It's not enough to just keep receipts, you also need to document who you spoke with, what you spoke about, and how it was related to your business. For travel, the IRS also requires you to keep a written or electronic log, made near the time that you make the expenditure, recording the time, place, amount and business purpose of each expense. This once took the form of expense reports. Increasingly, online programs and even apps, like Tax Tracker, are available for documenting business expenses.
Weltman also suggests creating a paper trail that can be traced if you are audited by the IRS. Take notes on meetings you attend while traveling, keep programs of conferences you attend, sign in to conferences, and keep e-mails sent to those you met with during business meetings.
As with all deductable business expenses, you are also expected to keep receipts for travel and entertainment purchases. For meals, make sure that the receipt includes the exact cost of the meal as well as the name and location of the restaurant. Get in the habit of writing down who was present (names and business relationship) and what business was discussed.
For entertainment expenses, document: the amount of each separate expense; the date of the entertainment; the name, address, and type of entertainment; the business reason for the entertainment; and the name, title, and occupation of the people who you entertained.
Dig Deeper: Small Business Tax Strategies
How to Write Off T&E: Additional Resources
What the IRS has to say about business and travel expenses: http://www.irs.gov/newsroom/article/0,,id=167363,00.html
Barbara Weltman's Tax Advice:
H&R Block is offering a full day of free tax advice from 12:01 a.m. CDT to 11:59 p.m. CDT on Thursday, March 25. E-mail email@example.com or call 866-HRBLOCK: http://getitright.hrblock.com/