One frequent source of conflict between the IRS and small business is the documentation of travel and entertainment expenses. The winner of the fight for the deduction usually falls to the IRS, because the tax law spells out detailed rules on how these expenses must be verified and documented. Almost all businesses consider the occasional wining and dining of customers and clients a necessary cost of doing business. The same goes for taking employees or business associates out for lunch once in a while. It is easy to think of these occasions as a necessary business expense, but sometimes they are not.
As a general rule, the IRS states that you may be able to deduct the ordinary and necessary business-related expenses you have for travel away from home, entertainment, gifts, or local transportation. An ordinary expense is defined as one that is common and accepted in your field of trade, business, or profession. Necessary expenses are ones that are helpful and appropriate for your business. Publication 463, Travel, Entertainment, Gift and Car Expenses, provided by the IRS explains what expenses are deductible and how to report them on tax returns, what records you need to prove the expenses, and how to treat any expense reimbursements you may receive. You can print this publication from their website at www.irs.gov.
Taxpayers who travel away from home on business are permitted to deduct travel expenses including fares, meals, lodging and incidental expenses. Travel would include airfare, ship, taxi, bus, airport limousine and auto expenses. Lodging and meals are deductible if the business trip requires an overnight stay or is long enough that a person may need sleep or rest in order to adequately perform duties. No, this is not the afternoon nap at a rest area. Incidental expenses may include dry cleaning or laundry, telephone use, fax use, computer rental fees or other communication devices.
Meals are only 50% deductible, whether you use the actual cost for your meal or the standard meal allowance. The standard meal allowance is an alternative to the actual cost method. It allows you to use a set amount instead of keeping records or receipts of your actual costs. The 2013 IRS rate for the standard meal is $46 per day in most areas of the United States. Other locations in the United States may qualify for higher rates—you can find these rates on the U.S. General Services Administration website at www.gsa.gov. To qualify for the standard meal allowance you must travel away from home on business or qualifying educational purposes. You cannot use the standard meal allowance in association with travel for charity or medical purposes.
One important break to note is that employees don’t technically need receipts for non-lodging expenses under $77 that are reimbursed by their employers. Although this is a big relief for some record keeping, it doesn’t mean that all documentation can be ignored. Receipts are still needed for all lodging expenses, even if under $77, unless the company pays travel expenses using only the IRS approved per-diem rate (see below). Those incurring the expenses will still have to record the time, place, business reason, and amount of each travel and entertainment cost—you just don’t have to keep all the receipts for audit purposes. Businesses must be careful though. For internal control, you may still want to look at the receipts less than $77 before okaying them.
If you have had business travel expenses and you can’t locate your receipts, don’t panic. The IRS will allow you to base your deduction on a per-diem method. This method allows you to use government travel allowances to determine your deductions for meals, incidental expenses and lodging. The U.S. General Services Administration (GSA) website will give you the allowable rate for each city. The federal per-diem schedule varies year-to-year as well as locality-to-locality, so be sure to keep an updated publication if using this method. While the per-diem rate may be smaller than your actual expenses, at least you won’t lose the deduction because you have misplaced your receipts. In some cases, the per-diem method may actually be greater than your actual expenses—so take it!
Remember that generally, club dues are not a deductible business expense. The IRS views social, athletic, sporting, airline, hotel and luncheon clubs as providers of entertainment for their members. In contrast, dues paid to professional associations, trade associations, and public service groups may be deductible if the dues paid were for a business purpose and the organization’s purpose is not entertainment. However, the meals served at these clubs may be a business deduction to the extent that you entertain clients or business associates.
Expenses to attend a convention or seminar in the United States may be deductible if there is a sufficient relationship to the taxpayer’s trade or business. However, a special rule prohibits the deduction of any costs of attending conventions or seminars for investment purposes. To qualify, the ship must be of U.S. registry, all ports of call must be in the United States or its possessions, and the meeting must be directly related to the taxpayer’s trade or business. Foreign conventions are subject to a higher standard than conventions held in the U.S. The taxpayer must establish that the meeting is directly related to the active conduct of his trade or business and that it is as reasonable to be held outside the North American area as within it.
And the most commonly asked question of all: What is the standard mileage rate this year? The answer is, 56.5 cents per mile in 2013. Henssler Financial can assist you with further information regarding this issue as well as any other tax related issues. Please contact our experts at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
