NOTE: This article was written prior to the Tax Cuts and Jobs Act of 2017. Therefore, information in this post may be inaccurate.
Business owners and executives often incur a number of travel, entertainment and meal expenses in the course of their everyday activities to grow and develop the business and their related skills. But what is expense material and what isn’t? Below is detailed discussion to help you sort it all out.
In general, travel, meal and entertainment expenses are deductible if they meet three requirements. Expenses must be:
If the directly related test cannot be met, the expense may qualify as “associated with” the active conduct of business if the meal or entertainment event precedes or follows a substantial and bona fide business discussion. Goodwill types of entertainment at shows, sporting events, night clubs, etc. can qualify. For meals, you (or an employee of yours) must be present.
Travel & Transportation
More specifically, deductible travel expenses include costs for carfare or airfare, meals, lodging, etc., incurred by an employee while away from home on a trip that requires the employee to stop for rest or sleep.
Deductible transportation expenses include the costs of transporting an employee from one place to another while not away from home. Your meals are deductible even if they are personal, i.e., not connected with business, although it would be limited. Personal entertainment costs on the trip aren’t deductible, but business-related costs such as for dry-cleaning, phone calls and computer rentals are.
Some allocations may be required if the trip is combined business/pleasure trip. For example, if you fly to a location for five days of business meetings and stay on for an additional period of vacation. Only the cost of the meals, lodging, etc., for the business days is deductible.
With respect to the cost of the travel itself (airfare, etc.) if the trip is primarily business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible.
If the trip doesn’t involve the actual conduct of business but is for the purpose of attending a convention, seminar, etc., IRS checks the nature of the meetings carefully to make sure they are not actually vacations. Be careful to save all material helpful in establishing the business or professional nature of this travel.
There is no deduction for the costs of a spouse or dependent who accompanies on a business trip unless the spouse is an employee of the company and the travel is also for a business purpose. Generally, only 50% of the amount otherwise allowable for meals and entertainment is deductible.
Entertainment includes entertaining business guests at nightclubs, sports games and theaters. Related expenses, such as taxes, tips, room charges, room rentals and parking fees must be included in the total expenses before applying the 50% reduction. A deduction is allowed for a spouse if the person entertained brings his or her spouse as well.
Expenses with respect to entertainment facilities generally are not deductible. A facility includes any item of personal or real property owned, rented or used by a taxpayer if it is used during the tax year for or in connection with entertainment. They include yachts, hunting lodges, fishing camps, swimming pools, tennis courts, bowling alleys, automobiles, airplanes, apartments, hotel suites and homes in vacation resorts. Country club dues are not deductible (although the meals purchased with business clients at the club are, up to the 50% limit). Deductions for skyboxes or other private luxury boxes at sporting events are limited to the face value of a non-luxury box seat ticket multiplied by the number of seats in the box.
Expenses for business meals incurred while attending a professional seminar away from home are 50% deductible. If a hotel includes meals in its room charge or if the employee is given a per diem allowance for meals, incidental expenses and lodging, a reasonable allocation must be made to determine the portion of the expenditures subject to the 50% disallowance. All other costs associated with the seminar, such as transportation, lodging and convention fees, are not limited.
Individuals whose work is subject to the hours of service limitations of the Department of Transportation, such as truck drivers, can deduct 80% of their business meal expenses.
Almost as important as qualifying for the deduction are the requirements for proving that it qualifies. The use of reasonable estimates is not sufficient to stand up to IRS challenge. You must be able to establish the amount spent, the time and place, the business purpose, and the business relationship of the individuals involved. Obviously, you must set up careful and detailed record-keeping procedures to keep track of each business meal and entertainment event and to justify its business connection. For expenses of $75 or more, documentary proof, such as a receipt, is required. The value of written evidence is greater than oral evidence, as is the value of written evidence that is recorded at or near the time of the expenditure.
Read our related post on “How Small Businesses Can Accurately Deduct (and Record) Common Small Business Expenses.”
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.
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