For decades, the IRS has closely scrutinized deductions for travel and entertainment (T&E), expenses, often challenging write-offs claimed by business owners. But the Tax Cuts and Jobs (TCJA) wipes out most entertainment deductions, beginning in 2018. Nevertheless, business clients still must worry about the “T” part of “T&E.”
In particular, the tax law imposes strict recordkeeping requirements that must be met to support deductions.
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The tax rules in this area continue to be tricky and fraught with numerous twists and turns. This is just a brief overview of what your clients need to know.
Starting point: Generally, you can deduct the cost of travel expenses when you’re away from home for business reasons. For instance, you might drive in your car or hop on a plane to visit a customer or supplier. For these purposes, your “tax home” is the general area or vicinity—for example, a city and its surrounding suburbs—of your principal place of business, regardless of the location of your home.
Assuming you meet the requirements, there’s a long laundry list of expenses that may be deductible, including the following:
- Air, rail and bus fares;
- Meals (limited to 50 percent of the cost);
- Baggage charges;
- Lodging expenses;
- Car expenses, including the cost of gas, oil, repairs, parts, tires, supplies, parking fees and tolls;
- Taxi fares or other transportation between the airport or station and a hotel, from one customer to another, or from one place of business to another;
- Cleaning and laundry expenses;
- Transportation costs for sample and display materials and sample room costs; and
- Tips on eligible expenses.
Note that the TCJA generally eliminates deductions for meals claimed as entertainment expenses—such as a lunch or dinner with a customer following a substantial business discussion—but it doesn’t touch the deduction for 50 percent of the costs of meals incurred while traveling away from home on business.
However, travel expenses are deductible only to the extent they are reasonable. No deduction is allowed for expenses that are lavish and extravagant under the circumstances, but the IRS gives you plenty of leeway. For instance, a deduction won’t be denied simply because you flew first class or dined at an exclusive restaurant.
Furthermore, the primary purpose of the travel must be business-related. That doesn’t mean you can’t combine some pleasure with business, but the trip can’t be a disguised vacation. In this case, be sure to spend more days on business matters than you do sightseeing or relaxing. Of course, costs attributable to your personal activities are nondeductible.
If you’re traveling by car or another vehicle, an extra set of rules come into pay. Essentially, you must keep track of all your expenses attributable to business travel, including gas, oil, tires, insurance, repairs, licenses, registration fees, etc. In addition, you may claim a depreciation deduction for the vehicle, based on its percentage of business use. For example, if you use your car 80 percent for business, you’re entitled to deduct 80 percent of the regular depreciation allowance.
Alternatively, you may be able to use the IRS-approved standard mileage deduction for the year. With this method, you don’t have to account for all of your actual expenses, although you still must record the mileage for each business trip, the date, the destinations, the names and relationships of the business parties and the business purpose of the travel. The standard mileage rate for 2019 is (plus any business-related tolls and parking fees).
Finally, as we alluded to above, the recordkeeping requirements for travel expenses are tough. Have clients keep the proof needed in a log, diary, trip sheets or similar records along with documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. To simplify matters, encourage clients to use an accountable plan. The plan should meet the following requirements:
- Expenses must have a business connection.
- Employees must account to the employer for these expenses within a reasonable time.
- The employer must require employees to return excess reimbursements within a reasonable and specific period of time.
Finish line: This in area of the law where your expert guidance can make a big difference. Help your clients protect their business travel deductions.