Maximizing Your Travel and Entertainment Tax Deductions
Winning new business and maintaining relationships with existing customers is not just time-consuming; it is also potentially very costly. Making sales often involves extensive travel, entertaining at good restaurants, attending special events, and even taking clients on vacation. The good news is that many of these relationship-building expenditures are tax deductible, provided your company keeps accurate records and can prove that the outlays were in fact business-related.
While the cost of commuting to and from the workplace is not deductible, expenses incurred by business owners or sales representatives who drive, fly, take taxis, or use other forms of transportation to meet customers are deductible. Your company can deduct the following business travel expenses:
When you use your own car for business purposes, you or your company may deduct the expenses in one of two ways: either record and deduct your actual expenses, including depreciation, or record your mileage and deduct a standard amount per mile of travel, plus parking and toll fees. The standard mileage rate through 2016 is 54 cents per business mile.
If expenses include accelerated depreciation, deducting actual expenses may at first provide a larger deduction. But keep in mind that you may not switch to the standard mileage rate in later years when it provides the larger deduction. If you lease a vehicle, you can either deduct actual expenses or take the standard mileage deduction.
Detailed recordkeeping is important to substantiate your deduction. To simplify your recordkeeping, you may want to keep a log in your car and use a designated credit card for gas and repairs related to business usage.
If you are on an overnight trip, you may also be able to claim deductions for travel-related expenses, such as the cost of meals (usually 50%), hotel expenses, telephone or computer rental fees, and even some tips. Expenses related to foreign travel are deductible, provided the main purpose of the trip is business-related, and the trip lasts one week or less.
If your company reimburses you for business travel, the reimbursement is not usually included in your income, and you are not permitted to deduct expenses. Travel expenses for which you are not reimbursed are deductible as miscellaneous itemized deductions subject to a 2% of adjusted gross income floor.
Because tax breaks for wining and dining clients can be easily abused, the Internal Revenue Service (IRS) has specific rules about what types of entertaining may be claimed as business expenses, and under what circumstances. However, 50% of the cost of many types of entertainment is deductible, provided they pass the IRS’s “directly related” or “associated” tests.
To meet the directly related test, you must be able to show that you had more than a general expectation of obtaining income or some other specific business benefit at some future time, that you engaged in business with the person being entertained during the entertainment period, and that the main purpose of the entertainment was the active conduct of business. To pass the associated test, you must show that the entertainment was associated with the active conduct of your business and directly followed or preceded a business discussion.
In practice, this means that a wide range of activities are potentially deductible, including restaurant meals, visits to sporting events and nightclubs, and even entertaining in your own home. There are, however, restrictions on the amount you may deduct when you take clients on certain types of trips, such as hunting, fishing, or yachting. The cost of renting and maintaining entertainment facilities is generally not deductible; however, the cost of providing meals is deductible. You are not allowed to write off membership fees for country clubs, but you can deduct part of the cost of joining professional and civic associations.
The rules for claiming these types of deductions can be complex. We can help you determine what tax breaks you may be entitled to receive and help you tailor your sales activities to maximize your savings.
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