The IRS requires that lodging expenses (and other expenses of $75 or more) be substantiated by records, or other evidence. Acceptable records include diaries, logs, receipts, paid bills and expense reports. The records should disclose the amount, date, place and essential character of the expense. The following are some tips to help you stay abreast of the required documentation:
- Keep good records of travel expenses;
- Maintain the records on a contemporaneous basis, i.e., make diary and log notations close to the time the expense is incurred;
- Document the business purpose and the expected business benefit, and
- Retain your travel itinerary to document the business activity while away.
Travel expenses are deductible only if the individual is away from his or her “tax home”—usually, considered to be one’s regular place of business—for more than one business day.
Meal expenses are deductible only if the trip is overnight or long enough that there is a need to stop for sleep or rest to properly perform one’s duties. The amount of the meal expenses must be substantiated, but rather than keeping records of the actual cost of meal expenses, a “standard meal allowance” ranging from $46 to $71 can generally be used, depending on where and when the individual travels. Generally, the deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible.
Lodging expenses must be substantiated with actual receipts and are 100% deductible. Meals included in lodging expenses, such as room service or dining costs charged to a hotel room, must be separately identified, since meals have the 50% limitation as noted above.
In addition to the travel, lodging and meal expenses discussed, the incidental costs incurred on a deductible trip, such as laundry, dry cleaning, phone calls, baggage handling, etc., are fully deductible. Employees must deduct their unreimbursed travel expenses as a miscellaneous itemized deduction, which is subject to a 2% of AGI floor. They are not deductible at all to the extent the employee’s income is subject to the alternative minimum tax (AMT). This is why it is advantageous to an employee to utilize an employer’s “accountable” reimbursement plan—under which qualified reimbursements are not taxable and not reported in the employee’s W-2 wages—rather than deducting the expenses on their tax return. On the other hand, these expenses are fully deductible, as a business expense for a self-employed individual.
Taking the Spouse Along? Generally, deductions are denied for travel expenses paid or incurred for a spouse, dependent or employee of the taxpayer, who accompany the taxpayer on the business trip unless the:
- Spouse or dependent is an employee of the taxpayer;
- Travel of the spouse, dependent or employee is for a bona fide business purpose, and
- Expenses would otherwise be deductible by the spouse, dependent or employee.
Strategy – The law allows a deduction for the single rate for lodging. Frequently there is no rate difference between one or two occupants. Thus, the entire lodging expense for an accompanying spouse should virtually be deductible. When traveling by car, the law does not require any allocation because the spouse is also traveling in the vehicle. Thus, if you are traveling by vehicle, the entire cost of the transportation is deductible. This would generally apply to taxis at the destination. The only substantial cost that is not allowed is the cost of the spouse’s meals, which if they were deductible, would be reduced by the 50% rule. If traveling by air or rail, the cost of the spouse’s tickets are not deductible.
If you have questions regarding your business travel expenses, call your Tax Consultant. Your Tax Consultant can help you Live Ready by making sure you take every eligible business deduction.
Disclosures:
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