Summer is coming and perhaps you are ready to mix your winter-weary business travel with some pleasure for the summer. To keep things simple and in tax compliance with IRS tax reporting, here are some tips on what is tax deductible and what is not.
The IRS allows ordinary and necessary travel expenses related to business. This means your business expenses should take a direct route to the primary purpose of your business trip. Overnight accommodations should be at a comfortable place such as a hotel or conference retreat. Accommodations shouldn’t be extravagant in luxury. Under the accountable plan, there is no tax reporting on actual receipts. The non-accountable plan, however, is reportable on Form W-2 for employees getting travel reimbursement in excess of actual receipts such as per diem or advance payments without using all of the funds.
If a traveling software salesman flies on a commercial jet to Los Angeles, stays at OMNI hotel, rents a Lincoln Town Car and drives around with his customers, then this may be an appropriate business tax deduction. Likewise using a limousine in Manhattan where transportation fares are reasonable and appropriate in this area may be acceptable. However, it’s not tax deductible for a local small business owner to fly on a private jet, rent a limousine and a book a large beach house for himself for a brief business lunch in Miami, Florida. So, some judgment is required in determining which business expenses appear reasonable and necessary.
If you are planning to mix your travel plans as business and pleasure, you will need to separate your personal expenses. Suppose Bob bring his family from Houston, Texas to Orlando, Florida for his jewelry tradeshow all day Thursday and Friday. Bob’s wife, Bonny, and their two children stay at his double bed hotel and they go to Disneyworld over the next three days while Bob works. They return home on Sunday night by commercial flight. Table 1 allocates Bob’s business and personal expenses.
Allowable Business Expense | Non-deductible Personal Expense
Four roundtrip airfares at $1,200
300.00 | 900.00
Double-bed hotel room at $150 a night
300.00 | 300.00
Car rental $500
300.00 | 200.00
Two luggage check-ins at the airport
25.00 | 25.00
Meals & incidental expenses (M&IE)* assume $49 per person each day
98.00 | 686.00
1,023.00 | 2,711.00
*incidental expenses are taxis, shuttles, tips, fees, etc
Because Bonny and children are traveling for vacation, that is a personal expense. There are a few exceptions here. If a spouse has a bona fide business purpose such as coordinating the inventory logistics, booth setup, greeting customers, negotiating and handling the point of sales (POS), then this would be an acceptable business expense. But it is not tax deductible if Bonny stopped by her husband’s jewelry booth to help briefly with the credit card transactions during a busy lunch hour.
Now if you decide to be a road warrior from Anchorage, Alaska to Key West, Florida, then it may be as simple as hopping in the car and being on the road collecting your gasoline and motel receipts. When driving from home to a temporary place of work or a business conference, you have two methods to calculate your auto expense.
1. Mileage x IRS standard mileage rate (.50 as of January 1, 2010), or
2. Actual expense such as depreciation, lease payments, insurance, gasoline, oil change, auto license, inspection fees, repairs, tire replacement, etc
You will want to use the method that gives you the maximum tax deduction. But if you choose the mileage method, you must use this method in the first year of your auto for business. Then you may change this to actual expense in the second year and after.
For the mileage method, you can keep a log of your date of travel, purpose, beginning and ending miles or miles driven on a notebook, daily planner, calendar, Excel spreadsheet, or similar method. Choose a tracking method that is comfortable for you so you won’t get frustrated or overwhelmed with complexity and then procrastinate.
For meals and incidental expenses (M&IE), the self-employed can use the IRS standard meal allowance instead of calculating the actual receipts. For employees, we recommend using the actual receipt under the accountable plan. IRS Publication 1452 has a list of city per diem rates for a given time frame. Meals and entertainment are subject to a 50 percent limit. The daily rate may also be prorated to ½ or ¾ day rate for traveling days.
Even if you use the standard mileage and standard meal allowance deduction method, you will still need to collect receipts or card statements as proof of business travel. If you don’t have anything to prove your time, place, and business purpose of your travel, then the IRS will disallow your tax deduction.
To make all this easier during your business travel, have a designated envelope to store your receipts. Make a note on the purpose of your receipt. The travel envelope also comes in handy to note the amount and time when a receipt is not available such as tipping the bellman or when your taxi driver ran out of receipts.
When you get home, you can slip the travel envelope in your tax reporting box and catch up on work. Then designate a time to enter your travel expenses in the accounting books or give it to your CPA for your year-end financial and tax reports.
Howard Knight, CPA, is the owner of Howard Knight CPA firm. To comment on this article, he can be reached at firstname.lastname@example.org.
CIRCULAR 230 DISCLOSURE: Any federal tax advice contained in this communication, including attachments and/or links, is not intended or written to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by Internal Revenue Code or applicable state or local tax law provisions or for promoting, marketing or recommending to another party any tax-related matters addressed herein.
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