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How to Boost Tax Deductions for Travel and Entertainment Expenses

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Dec 22nd 2016
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If you’re like most small business owners, you’re willing to go a long way to keep your clients happy. Frequently, that means jumping on a plane for a face-to-face meeting or treating them to a night out on the town. Assuming you meet certain requirements, you can take a deduction for unreimbursed travel and entertainment (T&E) expenses.

In fact, if you keep one eye on the calendar and another on your checkbook, you might be able to increase your T&E deductions for 2016.

Deductions for Travel Expenses
When you travel away from home on business, you may write off transportation costs, such as airfare or auto expenses, as well as meals and lodging, attributable to the travel. You also can write off incidental costs, like cab fare and tips. The deduction for meals is limited to 50 percent of the cost, while other travel expenses are fully deductible.

However, you must keep detailed records of your business travel expenses by contemporaneous diary or some other means.

Note that special rules may apply to deductions for vehicles used for business driving, including limits on so-called “luxury cars.” In lieu of deducting actual auto expenses for 2016, you may use a flat rate of 54 cents per business mile traveled, plus any related tolls and parking fees.

Accordingly, if you’re scheduled to visit a top business client halfway across the country in January, you might move up the planned business trip to December. As a result, you can deduct the qualified expenses – including airfare, lodging, and meals – on your tax return for 2016, thereby increasing your annual deduction.

Deductions for Entertainment Expenses
Generally, you can deduct entertainment expenses that are either “directly related to” or “associated with” your business. The deduction is limited to 50 percent of the cost.

  • Entertainment is directly related to your business if you discuss business during the entertainment and have more than a general expectation of deriving a business benefit. In other words, the entertainment can’t be just for goodwill and must take place in an atmosphere conducive to business discussion.
  • Entertainment is considered associated with your business if it precedes or follows a substantial business discussion. It’s not necessary to “talk business matters” during the entertainment. If the client is from out-of-town, the business discussion can take place the day before or the day after the entertainment.

As with travel expenses, you must keep detailed records of your entertainment expenses. Use a contemporaneous diary or log.

The end of the year often presents opportunities for entertaining business clients. For example, if you take clients out for dinner and drinks around the holiday, you can write off 50 percent of the cost if the above tax law requirements are met. And the deduction extends to expenses incurred for spouses and significant others.

Finally, be aware of a unique tax break. If you host a holiday party for your staff, you can write off 100 percent of the cost, rather than the usual 50 percent limit. But there’s a catch: You have to invite everyone in the company. You can’t restrict the gathering to just officers or other higher-ups.

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