You might be asking yourself, how do I deduct expenses for travel, meals and entertainment on my tax return? The answer to this question may not be as difficult as you may think.
To begin, the rules simply say that you can take a tax deduction for any business related expense that is ordinary and necessary. In other words, the general rule is that any expense you may have that can be viewed as necessary can qualify and that such expense must be ordinarily incurred for the type of business you conduct.
For example, let’s say that your business is such that you have lunch with your customers, or that you meet with new customers regularly. There is no requirement that your lunch meeting actually results in you getting the business. Just by the mere fact that you meet with your customer and your meeting is business-related. It may take several meetings before you actually get the business. Some work out. Some don’t. Either way, the costs you incur in picking up the tab will generally qualify as deductible expenses.
Let’s say you travel for work. Your travel can be directly related. Or indirectly related.
For example, let’s say you attend a conference in your industry. When going you may incur expenses for travel costs, hotel, entrance fees and even costs for your meals while your away. Generally speaking, these costs will qualify for a tax deduction on your return.
Now that you have the general idea of the fairly liberal rules of what qualifies, perhaps the most difficult part is what are the rules regarding how much you can deduct. Perhaps first and foremost, is you can’t deduct expenses that were reimbursed. If your employer or business reimburses you for your out-of-pocket costs, you can only take a deduction for your expenses in excess of your reimbursements. This is because your employer is entitled to the deduction, and naturally, you can’t take the same deduction as well.
Second, expenses you incur for meals and entertainment are usually only partially deductible. Meals and entertainment expense deductions are generally subject to a 50% limitation. For example, if you take your customers to lunch and the check comes to $100, you only receive a tax deduction for 50%, or $50. It does not matter what YOUR meal costs. Only that your deduction is business related, and otherwise qualifies.
There are other rules as well. For example, if you pick up the costs of lunch for your employees at work, you may be able to deduct 100% or the full amount. This special rule is applied when the costs are for the “convenience of the employer”. To qualify, this would generally apply when the costs are for meals at the workplace such as an in-house training seminar.
What about the costs of tickets you purchase for season tickets? Or what if your travel expenses are partially business related because you want to take the family with you, or spend a few extra days for pleasure? These are subject to other limitations as well.
Deducting meals and entertainment expense are carefully scrutinized by the IRS. If you’re going to take these deductions, you’re going to need to keep detailed receipts of who you met with and how the expense qualifies as a business expense. The rules are fairly liberal. Only that you discuss business immediately before, after or during the event meaning you can’t take your client to lunch today, deduct the expense, and not talk about business the following week.
In summary, you may be able to take advantage of the tax deductions afforded for travel, meals and entertainment expenses that you haven’t even considered before. And those deductions may significantly reduce taxes you owe, or increase your tax refund. Your deductions must qualify as valid business-related expenses, and not personal expenses you may otherwise incur. Certain types of expenses are subject to a variety of other limitations as well, such as the 50% limitation on deductions for meals and entertainment. Depending on whether you’re filing a business or individual income tax return, you may be subject to other limitations as well. Whenever you claim these types of deductions on your tax return, be aware that these types of expenses are usually scrutinized by the IRS, so it is important that you carefully document your deductions in accordance with the requirements.
For more help in navigating through the requirements, contact us at CPAMiami.com and we’ll send you free additional information to help answer any questions and get you started.