Travel And Entertainment Expenses Can Be Tricky!
By David Wm. Tuttle, Ph.D., CPA
Travel and entertainment expenses generally represent a substantial expense to most businesses, and if they are “reasonable and necessary” and the owner keeps adequate records for the amounts of the expenditures, then an IRS auditor will generally (after a thorough review) allow the expense.
If you happen to be audited by either the IRS or the Franchise Tax Board, you can generally count on all of your expenses in this category to be carefully scrutinized by the auditor because, from a statistical point of view, there is a lot of abusive deductions being claimed in this area.
This is so because automobile, travel, and entertainment expenses can either be personal, business or both—depending on the intent of the parties and whatever else is going through their minds at the time.
A lot of people erroneously claim expenses associated with going from their home to their place of work. This is clearly not correct, even if you were to install a telephone in your car and make business calls from it during the commute or if you were otherwise driving and conferring with clients on the way in to work.
There are some small exceptions to this general, no-deduction rule, in the areas of business trips out of town, carrying tools to work, and commuting to a temporary place of work.
If you do claim non-deductible commuting expenses, you can be sure that the audit will get off to a very bad start, and will get worse as it goes along.
Overnight-Sleep Test Limits Deduction Of Meal Costs
To be deductible, meal costs must be incurred while “away from home” and this test requires that they be on a business trip that lasts longer than a regular working day, and requires time off to sleep before returning home.
Meal costs during overtime are not deductible if you are not away from your place of business. Thus a pharmacist at a hospital could not deduct the cost of meals and sleeping quarters at the hospital during overnight or weekend duty.
Business Trip Deductions
Here are some allowable, away from home expenses available to the business traveler, if not reimbursed by the employer:
1) Transportation. Airplane, railroad, taxi and other transportation fares between your home and your out-of-town business location.
2) Meals. You may claim actual meal costs, but you must keep records. Generally only 50% of the meal is going to be deductible. Here again, the cost must be reasonable. Or you may use a standard meal daily allowance. (Please consult IRS Publication 1542 for per diem rates.)
3) Ground transport. Cab fares and other costs to get you from the airport to your hotel or to meet your clients is deductible.
4) Entertainment. Certain entertainment expenses are also allowable during your out of town stay if they are deemed to be reasonable and necessary under the circumstances.
Travel And Entertainment Record-Keeping Requirements
By law, to be able to support a deduction for the items above, they must be supported by either written records or witnesses.
A contemporaneous logbook has always been a favored form of proof. This document should list the time, place, and business purpose for your travel and entertainment expense as well as the person you were entertaining.
You should always try to keep copies of your airplane tickets, hotel invoices, restaurant tags and taxi cab receipts.
If your expenses are reimbursed by your company, you must keep records to support the reimbursement agreement with your company.
For more detailed information on this very important aspect of documenting and proving business travel and entertainment expenses, I encourage you to obtain and review IRS Publication 583 (Starting a Business and Keeping Records) and IRS Publication 552 (Recordkeeping for Individuals).
While traveling and having some fun on the business’ clock, I wish you the best of luck in staying away from the lion’s jaws (IRS audit assessments)!!
David Wm. Tuttle, Ph.D, CPA is the founding partner of Tuttle & Tuttle, CPAs. Their offices are located in Clovis, California. The firm specializes in tax matters, which include representing clients (who are either being audited or owe taxes they cannot currently pay) before the IRS, FTB, Board of Equalization, and Employment Development Department. They also analyze their client’s tax debts with a view toward possibly discharging them through a chapter in bankruptcy. To set up your appointment with Mr. Tuttle, please call (559) 291-5527.
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