Tax Strategies for Business Owners

Business travel and entertainment expenses draw close attention from the IRS, partly because they mix business with personal spending. Deductions are available, but the rules are specific, and the details change from time to time. Good records and a clear business purpose are the keys.

The Basic Test

To be deductible, an expense must be ordinary and necessary for your trade or business, and you must be able to substantiate it. Personal, lavish or purely recreational costs do not qualify.

Business Travel

Generally, when you travel away from your tax home overnight for business, you may deduct reasonable costs such as:

• Transportation to and from your destination.
• Lodging.
• Local transportation, such as taxis, rental cars or ride services.
• Business-related costs like shipping materials or communications.
• Meals, subject to the percentage limits that apply under current law.

If a trip combines business and personal days, expenses are usually divided, and the rules differ for domestic and foreign travel. Travel that is mainly personal generally does not become deductible just because you made a business call.

Meals and Entertainment

Congress has changed the treatment of these expenses over the years. In general, entertainment such as tickets, sporting events and similar activities is no longer deductible, while some business meals are partly deductible if they meet requirements. Qualifying conditions typically include a business discussion, a business contact or employee present, and costs that are not extravagant. Because the percentage and conditions can change, check current rules with us or at irs.gov before assuming a deduction.

Record-Keeping Requirements

Travel, meal and certain related expenses carry strict substantiation rules. For each, record:

• The amount.
• The date and place.
• The business purpose.
• For meals, who attended and their business relationship to you.

Keep receipts for lodging and for other expenses above the threshold set by the IRS, and keep a log or calendar to support the rest. Notes made at the time of the event are the most credible. Apps that capture receipts can make this much easier.

Employee Reimbursements

If you reimburse employees, an accountable plan lets payments be treated as non-taxable to the employee when they substantiate expenses and return any excess. Setting one up properly protects both sides.

Common Mistakes

• Writing off family travel without a real business purpose.
• Lumping expenses together without documentation.
• Failing to separate business and personal meals.
• Treating all entertainment as deductible.

To make sure your travel and meal deductions will hold up, contact our office.