The IRS imposes tough recordkeeping requirements on taxpayers claiming deductions for travel and entertainment (T&E) expenses. Frequently, write-offs are denied in court because of shoddy or missing records.
In a new case, Cristo TC Memo 2017-239, 11/29/17, a movie producer failed to substantiate lodging and meal expenses for staying at the homes of his ex-wife and aunt while away on business, but the Tax Court allowed him to deduct an amount based on the government “per diem” allowance.
Generally speaking, if you travel away from home on business, you may deduct the expenses of your business travel, including lodging and 50 percent of the cost of meals, within certain limits. However, to qualify for T&E deductions under the strict IRS recordkeeping rules, a taxpayer must substantiate the following:
- The amount of the expense;
- The time and place of the travel, meal, entertainment or use of the property;
- The business purpose of the expense; and
- In the case of meals and entertainment, the business relationship to the taxpayer of the persons entertained.
If expenses aren’t properly substantiated, the deduction may be denied.
One recordkeeping shortcut, however, may come to a taxpayer’s rescue. By using special rates established for travel by government employees, an employer may reimburse employees tax-free under simplified recordkeeping rules. These per diem rates are adjusted annually. For 2018, the rates for specified high-cost areas in the continental U.S. is $284 (up from $282), consisting of $216 for lodging and $68 for meals and incidental expenses (M&IE). The per diem for all other locations is $191 (up from $189), consisting of $134 for lodging and $57 for M&IE.
In this latest case, the taxpayer formed Desperado, a movie production company, in 2002. He was involved in securing financing for, producing and engaging in the preliminary development of a film originally titled “Walking on Water”, which was released in 2007 as “The Deep Below.” During 2002, the taxpayer spent significant time traveling for Desperado’s movie production business.
Throughout the production of “Walking on Water,” the taxpayer attempted to stick to a budget. He avoided hotel expenses by staying with his ex-wife while working in Phoenix, Arizona, and Aspen, Colorado, and his aunt while working in Tulsa, Oklahoma and Dallas, Texas. The taxpayer purchased groceries and housekeeping supplies in return for their hospitality.
All told, the taxpayer stayed with his ex-wife for 167 nights and 21 nights at his aunt’s in 2002. He claimed to have spent more than $4,400 and that he should be allowed to deduct this amount in lieu of lodging. The taxpayer also argued that he is entitled to a deduction for M&IE of more than $8,300 using the per diem rate in effect for 2002.
However, the taxpayer failed to properly substantiate the T&E expenses. Notwithstanding the absence of receipts for the groceries and housekeeping supplies, his relationships with his hosts and his admitted consumption of some of the groceries, the IRS determined that he should be limited a deduction of 50 percent of that per diem amount. After reviewing the facts, the Tax Court agreed with the IRS’s analysis.
Lesson to be learned: There’s no substitute for detailed recordkeeping of T&E expenses. Ensure that your clients meet the requirement under the tax law.
About Ken Berry
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.