There are many things that are “common knowledge” about income taxes. Unfortunately, some of them are simply wrong. This short series of blog posts will address some of them. This post examines some myths about travel, meals and entertainment deductions.
Go on and spend the money, it is deductible.
This common refrain covers a lot of territory. It typically only affects business owners, although taxpayers with large amounts of unreimbursed employee business expenses also succumb to this. (Recent changes to tax laws have affected the rules regarding unreimbursed business expenses.) Not all expenses are deductible. You can refer to Publication 463 Travel, Entertainment, Gift, and Car Expenses for specifics. There is a table listing types of expenses that are deductible if they are incurred for a bona fide business purpose near the end of this post. Keep in mind that even when expenses are deductible, they are still expenses.
Talk about business so your lunch or dinner can be a business expense.
This is an example of an expense that is not deductible. Simply talking about business does not make something a business meeting. While meals and entertainment can be deductible, there must be a bona fide business reason.
In plain terms, expenses for business should be ordinary and necessary. The IRS defines these terms in Publication 535 Business Expenses.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
Even a casual reading of this definition makes it clear that meeting a client or prospective client for dinner may be a deductible expense. So too might be a lunch meeting with a coworker or employee if the purpose is directly related to business. However, it is not appropriate to deduct the expense for routine meals. You may be able to expense regular meals for employees in some circumstances. Deductibility may also depend on the nature of your business. You should consult with your tax advisor for the details.
Two common myths have to do with the cost of meals.
- Go on and go to the fancy place, its deductible.
- Don’t try to deduct very expensive meals.
As usual, the truth is something else. Pub 463 addresses the topic of lavish or extravagant meals.
You can’t deduct expenses for meals that are lavish or extravagant. An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances. Expenses won’t be disallowed merely because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts.
In other words, cost by itself will not affect whether you can deduct an expense. Remember the definition of ordinary and necessary described earlier. Keep in mind that even though the expense may be deductible, meal and entertainment expenses are limited to 50 percent of the actual expense or standard meal allowance amount.
If you go on a business trip, you can stay a few extra days and write off the expense. If you take along a companion, that is deductible also.
Bad idea. IRS Publication 535 Business Expenses explains,
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
Using this as a guide, you would be able to deduct the business portion of your trip. However, expenses for extra days or for companions are personal expenses and are not deductible as business expenses.
Another variation on this theme is:
If your small business has annual meetings, hold them in places that are also resort or vacation destinations, so you can write off the trip.
This may be partly true depending on the circumstances, but like many myths, it starts with truth and then distorts into falsehood. The expenses associated with your businesses meetings are deductible if they have a business purpose. Once you go beyond the bona fide business purpose, then the expenses are no longer deductible. Be very careful about trying to deduct that wintertime company meeting at a beach resort. The details about what are likely to be acceptable may depend on the nature of your business. You should consult with your tax professional.
The table below lists the types of travel expenses that you can deduct. Remember to keep receipts and documentation.
Travel Expenses You Can Deduct
Excerpted from Publication 463 Travel, Entertainment, Gift, and Car Expenses
|IF you have expenses for... ||THEN you can deduct the cost of...
|transportation||travel by airplane, train, bus, or car between your home and your business destination. If you were provided with a free ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. If you travel by ship, see Luxury Water Travel and Cruise Ships , under Conventions, earlier, for additional rules and limits.
|taxi, commuter bus, and airport limousine||fares for these and other types of transportation that take you between:
The airport or station and your hotel; and
The hotel and the work location of your customers or clients, your business meeting place, or your temporary work location.
|baggage and shipping||sending baggage and sample or display material between your regular and temporary work locations.
|car||operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.
|lodging and meals||your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Meals include amounts spent for food, beverages, taxes, and related tips. See Meals , later, for additional rules and limits.
|cleaning||dry cleaning and laundry.
|telephone||business calls while on your business trip. This includes business communication by fax machine or other communication devices.
|tips||tips you pay for any expenses in this chart.
|other||other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer.
Don’t become a victim of tax myths. “Everybody does it” is not a good defense if your deductions are questioned. If you have travel or meals and entertainment expenses for your business, be sure to deduct them. However, make sure that they are for a legitimate business purpose and that you can substantiate them.