Travel and entertainment are legitimate deductions, but few business owners take full advantage of them. One reason may be that they fear that the deduction will be challenged by the IRS and they’ll have to undergo the scrutiny of an audit. Another reason may be because the owner is unsure of how to take the deductions or what’s allowed and what’s not allowed. To be clear, travel and entertainment are allowable deductions. the IRS understands that much of business is conducted over drinks, meals or on the golf course. Travel is also an obvious necessary to conduct business. If you’ve been hesitant about taking travel and entertainment deductions, here is a guide to maximizing the benefits of these deductions.
What’s Really Allowed?
The first thing is to feel more confident about what’s really allowed with travel and entertainment expenses. That will enable you to recognize the expense when it occurs and to fully take advantage of every possible deduction.
Travel Expense Allowances
Travel expenses related to your business activities are allowed in the following two categories:
1. Travel to and from business activities
2. Meals and related expenses relating to the travel you do for business.
For example, if you are an engineer, and you have to visit construction sites to monitor work, all your travel expenses to and from the job site are deductible. If you drive there, you can deduct your mileage. If you fly there, you can deduct the price of your airline ticket.
When you are away from home traveling on business, you can’t make meals for yourself, so you’re allowed to deduct meal expenses. Say you’re staying in a hotel during your business trip. The hotel and room service charges are tax deductible. You have to get your suit pressed for your meeting, so that’s deductible, too. The tip you give to your taxi driver that takes you to the meeting is also deductible. The tip you give to the waitress who serves your meals while you’re on your business trip away from home is deductible, as well as the drinks you order while waiting for your meal. Note that these things are deductible while traveling away from home on business, not necessarily while you’re having meals outside the home where you live.
Travel Expenses Not Allowable
There are some business travel expenses that aren’t allowable, or that might be questionable. For example, if it’s raining when you leave your hotel to go to your meeting and you buy an umbrella, that may not be deductible. If you buy reading material to keep you occupied because your client is running late for the meeting, the book or newspaper likely isn’t tax deductible.
Meals Expenses Not Allowable
If you eat lunch at home to prepare for a meeting, that cost isn’t deductible. If you buy a snack to eat in the car on the way to your meeting that’s near your home, that’s likely not deductible.
Maximizing Entertainment Tax Benefits
It’s very important to understand what’s allowed as an entertainment deduction and what isn’t. Knowing this will help you take advantage of allowable deductions and feel more confident about how you spend when you’re with clients.
The first thing to remember with entertainment deductions is that the entertainment must be directly related to your business or directly associated with it. And the entertainment expense must be substantiated with receipts.
The second thing to remember is that only half of what you spend on entertainment is deductible. And, they must be reasonable and not overly lavish.
For example, if you buy tickets for you and your client to attend a sporting event and you talk about business beforehand or after, you can deduct half that cost. But if you go out of your way to book a charter flight to the Bahamas for you, your client and your client’s family, that’s definitely going to get some scrutiny.
If you belong to a country club so you can network with prospective clients, your club membership isn’t deductible. But if you pay for a one-day pass to a club so you can entertain your client on the golf course, that’s deductible.
When You’re Not the Owner
Finally, if you are the employee and not the owner, you may get reimbursed for business expenses through your employer. In that case no travel and entertainment expenses are directly deductible on your tax return, except ones that aren’t reimbursed. For those, be sure to keep your receipts and submit them to your tax professional for closer inspection at tax time.
Extra Tips For Maximizing Benefits
If you really want to make sure you’re getting all the advantages you’re entitled to, here are three extra tips:
1. When in doubt, add it to your list of deductions and keep your receipts. Your tax professional can make the final decision on whether or not to deduct it. But if they do, they’ll have the receipt to back it up.
2. Don’t mix business and pleasure. Avoid running errands to and from business meetings. Don’t invite your spouse or kids to business meetings unless it’s that kind of event. Don’t use your business credit card for personal items. Have separate loyalty cards for business and personal.
3. Get tip receipts. If you tip in cash on business trips, ask for a receipt. Business hotels are accustomed to this practice. For restaurants and taxis, you may have to ask for a receipt.
You’re entitled to take tax deductions for travel and entertainment but the key to maximizing this benefit is to know the rules and follow the rules. As long as you stay within the law you never have to worry, even if you do ever get audited. Your receipts will back up your returns. And remember, your tax professional is always a good resource if you ever have any questions about whether or not an expense is an allowable deduction. All you have to do is ask.
Have a question? Contact Kazim Qasim.