Travel and Entertainment: Maximizing The Tax Benefits

Don't overpay your income taxes by overlooking expenses which you are entitled to deduct. Use this Financial Guide to ensure you are handling your business travel and meal costs in a tax-wise manner.

 

Travel Expenses

Tax law allows you to deduct two types of travel expenses related to your business, local and what the IRS calls "away from home."

1. First, local travel expenses. You can deduct local transportation expenses incurred for business purposes, for example, the cost of getting from one location to another via public transportation, rental car, or your own automobile. Meals and incidentals are not deductible as travel expenses, although as you will read later in this guide, you can deduct meals as an entertainment expense as long as certain conditions are met.
2. Second, you can deduct away from home travel expenses-including meals and incidentals; however, if your employer reimburses your travel expenses, your deductions are limited.
   
   
   

   Local Transportation Costs

   The cost of local business transportation includes rail fare and bus fare, as well as the costs of using and maintaining an automobile used for business purposes. For those whose main place of business is their personal residence, business trips from the home office and back are considered deductible transportation and not non-deductible commuting.
   

   Note: Please see the special section below for the most effective ways of deducting auto expenses.

   You generally cannot deduct lodging and meals unless you stay away overnight. Meals may be partially deductible as an entertainment expense as discussed below.
   
   
   

   Away From-Home Travel Expenses

   You can deduct one-half of the cost of meals (50 percent) and all of the expenses of lodging incurred while traveling away from home. The IRS also allows you to deduct 100 percent of your transportation expenses--as long as business is the primary reason for your trip.
   To be deductible, travel expenses must be "ordinary and necessary", although "necessary" is liberally defined as "helpful and appropriate," not "indispensable." The deduction is also denied for that part of any travel expense that is "lavish or extravagant," though this rule does not bar deducting the cost of first-class travel or deluxe accommodations or (subject to percentage limitations below) deluxe meals.
   What does "away from home" mean?
   To deduct the costs of lodging and meals (and incidentals-see below) you must generally stay somewhere overnight. In other words, away from your regular place of business longer than an ordinary day's work and you need to sleep or rest to meet the demands of your work while away from home. Otherwise, your costs are considered local transportation costs and the costs of lodging and meals are not deductible.
   Where is your "home" for tax purposes?
   The general view is that your "home" for travel expense purposes is your place of business or your post of duty. It is not where your family lives (some courts have stated that it's the general area of your residence).
   
   
   
   

   Meal and Entertainment Expenses

   Prior to tax reform, there were limits and restrictions on deducting meal and entertainment expenses, with most deductible at 50 percent. Under tax reform, there were a number of changes, the most notable being that entertainment expenses paid or incurred after December 31, 2017, are not deductible unless they fall under specific exceptions, for example, expenses incurred for social activities primarily for the benefit of your employees. As such, reasonable costs for food and refreshments for year-end parties for employees are 100 percent deductible.
   Meal costs must be "ordinary and necessary" and not "lavish or extravagant" and directly related to or associated with your business. They must also be substantiated. Prior to 2018, if you rented a skybox or other private luxury box for more than one event, say for the season, at the same sports arena, you generally could deduct more than the price of a non-luxury box seat ticket. Each game or other performance counted as one event, and the deduction for those seats was subject to the 50 percent entertainment expense limit. Starting January 1, 2018, however, that deduction is eliminated. Furthermore, even if costs of food and beverages are separately stated, you cannot deduct these expenses.
   Deductions are still disallowed for depreciation and upkeep of "entertainment facilities"-yachts, hunting lodges, fishing camps, swimming pools, and tennis courts. Costs of entertainment provided at such facilities are no longer deductible. Prior to 2018, these expenses were deductible at 50 percent, subject to entertainment expense limitations.
   Dues paid to country clubs or social or golf and athletic clubs are not deductible nor are dues that you pay to professional and civic organizations. Prior to 2018, these dues were deductible at 50 percent as long as your membership has a business purpose. Such organizations included business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards.