Travel expenses are the ordinary and necessary expenses incurred when a person is away from his tax home overnight for business or employment purposes. Your tax home is defined as the general area where your principal place of business is located. The following travel expenses are deductible if not fully reimbursed by your employer:
- Airline, train, or bus fares;
- Operation and maintenance of an automobile (actual costs or the standard mileage rate may be used);
- Taxi fares or other costs of transportation to and from the airport, from one customer to another, or from one place of business to another;
- Meals (50% limitation) and lodging;
- Cleaning and laundry expenses;
- Business telephone and fax, or
- Other similar expenses incident to travel.
Employees report travel and other employee business expenses on Form 2106, Employee Business Expenses, or Form 2106 EZ. Total business expenses are reported less reimbursements (reported on line 7 of Form 2106) from the employer. The net amount of un-reimbursed expenses is then deducted on Schedule A Itemized Deductions subject to the two percent of AGI limitation.
Employees that account for all business expenses to their employer and receive reimbursement equal to the exact amount of the expenses do not report or deduct the expenses. Some employers do not require an employee to account for their expenses. The employer simply increases the employee’s pay in the expectation that the employee will incur business expenses. In this case, the additional wages are included in compensation on the employees Form W-2 and are not shown as reimbursements on line 7 of Form 2106.
There are different rules for travel within and outside of the United States. For additional information see IRS Publication 463, Travel, Entertainment, Gift and Car Expenses, or contact your tax advisor.
Other Employee Expenses
Other deductible employee expenses include entertainment and meals (50% limitation), business gifts, dues to business or professional organizations, stationary and postage, telephone expenses, and home office expenses. For more information on home office expenses see our C.P.A. Insight article, “Who Can Deduct Home Office Expense?”
Entertainment and meals while away from your tax home are deductible if not reimbursed by your employer. A clear business purpose and a substantial business discussion must occur before, during, or after the meal or entertainment. Entertainment and meals are subject to a 50% limitation on Form 2106.
Business gifts to clients or customers are deductible up to a maximum of $25 per year, per customer. This limit does not apply to promotional items costing $4 or less such as pens, key chains, and the like.
Dues to business or professional organizations are deductible. However, club dues such as those paid to country clubs, social clubs, etc., are not deductible.
Telephone and fax expenses may be deductible. Long-distance calls are deductible; however, the base rate for the first telephone line into your home is never deductible. The business use portion for optional services, such as call-waiting, and the cost of a second line for business purposes is deductible.
In general, records should show the following details:
- Cost of each separate expense for travel, lodging, and meals. Dates of travel, destination, and business purpose.
- For entertainment expenses, you should also document the attendees and their business relationship to you.
- For car expenses, date of the expense, business mileage and purpose should be documented. For automobile expenses, a written log is not required but does provide more substantial evidence if the expenses are challenged by the IRS.