Travel and entertainment costs are a common expense for most businesses. Unfortunately, the rules for deducting T&E costs can be complicated and are often misunderstood. Here are five myths that you should be aware of.
1. The full cost of business meals and entertainment is tax deductible.
Taking a customer to lunch, wining and dining a vendor or taking a prospective client to the theater or sporting event are normal business practices. Regardless of how much or how little you spend, you can only write off 50 percent. For example, you take an out-of-town customer to dinner and the theater. It costs you $350 for the evening. You can deduct $175; the balance is not deductible.
2. The cost of commuting to and from work is deductible.
Regardless of how far you have to commute, the method of transportation you use or what it costs you, you cannot deduct the cost of commuting. This is considered to be a nondeductible personal expense.
If you have to pay extra to transport business-related tools during your commute, such as heavy equipment or large musical instruments, the added expense is deductible.
Once you are at work, your travel to other business locations becomes deductible. A doctor can deduct the travel costs between her medical office and the hospitals at which she had privileges, but not the cost of getting to the medical office. If you have a home office for which you take a tax deduction, all business-related trips—to see a customer or vendor, do banking or buy supplies—are deductible; this is not commuting.
3. You need receipts for all T&E costs.
You do not need receipts for expenses of $75 or less. Thus, if you take a taxi from your office to see a customer for a cost of $12, no receipt is required. Exception: You need a receipt for lodging of any amount, even at a Motel 6.
While you may not be required to keep all receipts, it doesn’t hurt to do so. They often serve as a reminder for a deductible expense, especially if you’ve paid cash (e.g., the taxi ride).
4. There is a dollar limit on what you can deduct.
There is no overall dollar limit on your deduction for T&E expenses. However, you can’t deduct meal and entertainment costs that are “lavish and extravagant.” The tax law does not define these terms. It’s up to you (and your tax advisor) to decide whether costs are “too much” before you deduct them.
5. You can’t deduct a trip if your family comes along.
The tax law lets you combine business with pleasure under the right conditions. If you travel within the U.S. and the primary reason for the trip is business, you can deduct all of your travel (e.g., airfare) costs. The fact that your spouse, significant other or your family comes with you does not negate your deduction.
It may not even cost you anything extra (other than meals) to bring your spouse with you. If you drive, there’s no extra cost, and usually there’s no additional charge for another person in your hotel room.
You can’t deduct your costs for the portion of your trip spent sightseeing, visiting family or pursuing other personal endeavors. For example, say you travel from Trenton, NJ, to Los Angeles to meet with clients on Monday, Tuesday, Wednesday and Thursday. You spend the rest of the week sightseeing and take the redeye home on Sunday night. The cost of your hotel and meals on the nonbusiness days is not deductible. But your entire airfare remains deductible because the primary purpose of the trip was for business. Remember, even on the business days, only 50 percent of your meals are deductible.
You can learn more about deducting travel and entertainment costs in IRS Publication 463. (The IRS has not yet released the version for the 2011 return, but the general rules still apply.) Also check with your tax advisor to determine the tax impact of your T&E activities.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day, the monthly e-newsletter Big Ideas for Small Business (at www.barbaraweltman.com) and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.