Business Travel Expenses

Traveling expenses include travel fares, meals and lodging, and incidental expenses. Only expenses that are reasonable and necessary in the conduct of the taxpayer’s business and directly attributable to it are deductible.

Travel expenses incurred while away from home and in connection with an existing business are qualified travel expenses. Travel expenses incurred in connection with starting a new business should be added to amortizable start-up expenses. Travel expenses also must be reasonable considering the facts and circumstances. This does not mean that the IRS would deny costs related to first class travel and dining and entertaining at high end restaurants. If those expenses are “helpful” in acquiring more customers, increasing sales and revenues, and it is customary in that particular business or industry, then most likely they may not be considered lavish and unreasonable. The IRS gives a great deal of latitude and considers the facts and circumstances.

Travel that is both business and personal in nature is more complicated. If the trip is primarily for business purposes, the cost of traveling to and from the location is fully deductible and hotel, meals, and other traveling expenses allocable to business portion of the trip are deductible. Generally, the amount of time spent pursuing business versus pleasure activities is the determining factor in establishing primary business purpose. Keeping a log to document business activities is usually acceptable proof of business purpose in the event of an audit by the IRS.

However, if the trip is primarily for personal purposes, no portion of the travel expenses to and from the destination is deductible. While at the destination, expenses which are properly allocated to the taxpayer’s business are deductible. For example, if the taxpayer is attending a trade convention in New York lasting 2 days and then spends 5 days vacationing and sightseeing, the airfare would not be deductible, but he could deduct lodging and meals for the 2 days spent on business activities. The remaining 5 days are personal in nature and no deduction is allowed.

If a spouse, dependent or another individual accompanies a taxpayer on a business trip, expenses attributable to the spouse’s or other person’s travel are not deductible unless it can be proven that their presence has a bona fide business purpose. Typically, spouse’s services which are incidental to the business do not establish a business purpose. The courts have distinguished between “necessary” and “helpful” services. Providing merely “helpful” services such as, taking occasional notes or organizing and hosting social functions, do not typically rise to the level of bona fide business purpose. 

Business Meals and Entertainment    

Expenses for meals and entertainment must be related to taxpayer’s business in order to be deductible. The IRS views these expenses either directly related to and/or associated with a trade or business. Directly related expenses would include hospitality rooms to clients or potential clients at conventions and trade shows where business is actively conducted in and outside the entertainment setting. The associated-with test is met if the expenses are associated with the active conduct of business and the meals or entertainment directly precedes or follows a substantial business discussion. The purpose may be to get new business or to encourage the continuation of an existing business relationship.

According to the IRS, a business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit.  If the business discussion and entertainment do not take place the same day, the IRS will consider facts and circumstances. The facts to consider are: place of the meeting, length of the meeting, travel distances, arrival and departure dates of participants, and other reasons the entertainment didn’t take place on the same day.

Entertainment costs include, but are not limited to, cost of food, beverages, taxes and tips, face value of tickets to entertainment events, cost of recreational outings, and expenses for any activity considered to provide entertainment, amusement, or recreation. Dues and initiation fees for memberships in country clubs, social clubs, and athletic clubs are not deductible.

Deduction for meals and entertainment is limited to 50% of the total cost. However, you are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event.

Substantiation

Proof of payment alone does not establish a deduction. It must also be shown to be ordinary and necessary. The character of these expenses may also be challenged (personal vs. business).

The IRS has determined that some expenses are subject to abuse and have applied strict substantiation rules. The requirements to substantiate are:

1. The amount of item.
2. The time and place the expense occurred.
3. The business purpose of the item.
4. The business relationship to the taxpayer of the recipient of the entertainment item.

IRS Publication 463 discusses the deduction for business expenses and required recordkeeping. Examples are: cost of separate expense for travel, lodging, and meals. Incidental expenses may be totaled in reasonable categories. Dates you left and returned for each trip and number of days spent on business. Business purpose for the expense or business benefit gained or expected to be gained. 

For entertainment, document relationship, such as identities, occupations, titles, or other designations and show their business relationship to you. Also, you must also prove that you or your employee was present. 

Business travel and entertainment remains an area frequently scrutinized by the IRS but with proper substantiation, it is easily defendable.  As with any deduction, proper documentation is the key.