Deducting
Business
Travel and Entertainment Expenses
Whether
you’re running your own business or working for someone else, you probably
spend some amount of money on travel and entertainment expenses. As long as you
have a clear business purpose for the expense, Uncle Sam may help you foot the
bill by providing you with tax deductions. Strict rules apply, however, so
it’s important to understand the definition of qualified expenses.
Travel Expenses
Travel expenses are the ordinary and necessary costs you incur when you
travel away from home for your business. For tax purposes, an ordinary expense
is one that is common and accepted in your business; a necessary expense is one
that is helpful and appropriate to your business. To meet the IRS’s definition
of “away of home,” you generally must be away from home longer than a
regular workday and it must be reasonable for you to sleep or rest.
Typical travel expenses include the cost of transportation to your
business travel destination, local transportation and incidentals such as phone
calls.
When your business trip necessitates an overnight stay, you may deduct
what you pay for lodging. The cost of your meals while away from home on
business is deductible as well (subject to a 50 percent limit). Meal costs
include amounts spent for food, beverages, taxes, and related tips.
Incidental expenses for laundering and dry cleaning, fees to send or
receive business-related faxes, and gratuities you pay for services while away
from home on business are deductible in full.
Entertainment Expenses
In
order for an entertainment expense to qualify for a tax deduction, in addition
to being ordinary and necessary to your business, the business entertainment
expense generally must meet one of two additional tests. The expense must be
either (1) "directly related" to the business, which means that
business must actually be discussed during the entertainment, or (2)
"associated with" the business. To satisfy the "associated
with" test, the entertainment must take place prior to or immediately after
a business discussion.
Under current tax law, 50 percent of the amount you spend, including
taxes and tips, to entertain your client, customer, or employee, is deductible.
Entertaining guests at a sporting event, theater, country club, or nightclub all
apply, as does a round of golf or a game of tennis. But before you rush out and
pay a premium for tickets to the theater or a sporting event, you should know
that your deduction is limited to the face value of the ticket. No deduction is
allowed for fees paid to scalpers or ticket brokers, and your deduction for the
cost of skyboxes and other private luxury boxes at a sports event is limited as
well. Entertainment expenses may include the cost of a meal you provide to a
customer or client, whether the meal is part of the entertainment or separate.
Generally, to deduct an entertainment-related meal, you or your employee must be
present.
Record keeping Requirements
For travel and entertainment expenses, you must have adequate
substantiation for the expenses you claim. In general, to substantiate each
expenditure, you must show the amount, the date, the location, the business
purpose for the travel, and the business relationship you have with the person
or persons you entertained. The exact type of substantiation required depends on
the item and the amount of the expense. Check with your tax professional for
more detailed information on substantiation requirements.
Currently, you do not need a receipt if the expenditure (except for
lodging) is less than $75 or, in the case of transportation costs, if a receipt
is not readily available, such as may be the case with a cab ride.
If
you are self-employed, you can deduct your expenses as part of your adjustments
to income. If you are an employee, you add your unreimbursed expenses to your
miscellaneous deductions. Your deduction is then limited to the total amount of
miscellaneous expenses that exceed two percent of your adjusted gross income.
Not that this could also result in your being subject to Alternative Minimum
Tax.
Business Gifts
As a token of your appreciation, you may make deductible gifts to your
customers, clients, distributors, and employees as long as the value does not
exceed $25 per person per year. (The cost of wrapping, insuring, or shipping the
gift is not included in the $25 limit.) Gifts of nominal value ($4.00 or less)
such as magnets, pens, and calendars imprinted with your company name are not
included in the $25 limit. If you give a customer both a $25 gift and a
calendar, you may deduct the cost of both items.