There is an very funny scene in the movie The Wolf of Wall Street, when Max Belfort (played by Rob Reiner) bursts in on his son, Jordan Belfort (Leonardo DiCaprio) demanding to know why he spent $26,000 on a single client dinner expense.
And while the IRS does allow deductions for T & E, or travel and entertainment expenses, going too far with this write off can get you in hot water, as the real-life Jordan Belfort found out the hard way.
In this article, we will walk you through the do’s and don’ts of how to claim and properly document these valuable tax saving deductions for meals and other travel related expenses, while staying well within IRS guidelines.
The general criteria established by the IRS to qualify for deducting meals and travel expenses are that they be ordinary and necessary expenses, and that they are directly related to your business or pass the associated test.
To meet the directly related rule, the main purpose of the expense must be to legitimately develop or discuss your business. In other words, you must be able to confirm that business was the main purpose.
The expenses will not generally be considered “directly related” if the business is held in a place where there are substantial distractions. For example, as per IRS publication 463: “Business generally isn’t considered to be the main purpose when… combined on hunting or fishing trips, or on yachts or other pleasure boats.”
However, even if the expense did not meet the directly related test, it could meet the associated test by being associated with your business if it occurred before or after a substantial business decision or discussion.
The active exchange must have been a discussion, meeting, negotiation, or some other business to receive the benefit of the tax deduction. The business may have occurred the day before or even the day after. It doesn’t matter, just as long as the business was conducted on the same trip.
Business related meal expenses can only be deducted at 50% after recent tax reform changes. But these expenses may include taxes, tips, cover charges, etcetera. Room rental and parking expenses are 100% deductible. So, they can still add up to a substantial tax saving deduction.
Other expenses that are associated with any entertainment or recreational activities connected to business meetings or discussions are, unfortunately, no longer deductible.
Also, keep in mind that the cost of the transportation to and from the business-related activity is not subject to the 50% limit. If your company pays you under an accountable plan, which we cover below, you are not subject to the 50% limit on reimbursed expenses. If your client reimburses you for expenses in connection with services you provide, and you provide the records to the client, you are also not subject to the 50% limit.
You may not deduct memberships for any club or organization for business, pleasure, or recreation if one of the club’s principal purposes is to conduct entertainment or provide access to entertainment facilities. Generally speaking, it is the purpose of the activities of the club, not its name, that determines if you can deduct the expense.
One more rule to be aware of. You may not deduct lavish or extravagant expenses. However, you may adjust the deduction to the cost of a reasonable expense.
For travel, you must document where and when you were traveling, as well as the purpose for the travel. Account for each separate expense and keep all the receipts together. Record keeping for meals is similar and you should report incidentals such as tips and fees, the address and name of the location, as well as the date.
Record all names of participants and the business relationship with each. And of course, document the specific business reason for the meeting.
Transportation records should include mileage, the business destination, each expense incurred, and the purpose of the business at hand.
Now let’s move on to an example to help illustrate these points.
In order to deduct your travel expenses – including airline tickets, lodging and one-half your meals, you have to meet the 50% rule. That means that if less than 50% of the travel days are actual days spent conducting business, you can only take a pro-rata deduction for the travel expenses.
The flip side of that is that so long as 50% of your travel days are business days, you can deduct all your travel expenses, plus 50% of the cost of your meals.
Suppose you want to hit the ski slopes for a few days. You arrange a business meeting in the Denver area – scheduled in advance. You set it up for Friday with a follow up meeting on Monday. Each travel day counts as a business day. Friday and Monday are business days because you have your scheduled meetings (by the way, the meetings don’t have to last all day – they just have to be actual business-related meetings).
Also, if your business includes attending a conference, then you must attend for at least 4 hours and 1 minute for it to count as a business day. And because you sandwiched your free time between a Friday and Monday meeting – they count as business days as well.
So, let’s recap.
Who says you can’t mix business and pleasure … and still get a valuable tax break for it!
As you are probably aware as a business owner, annual meetings are required for corporations to assure compliance with state rules.
It could be as simple as holding it in your home office, but some corporations choose to hold their meeting off site. As long as you hold your meeting within the continental United States or its territories, you may select the location based on your needs. Deducting travel expenses when doing business away from home, including your company’s annual meeting, is considered ordinary and necessary.
These expenses can include, but are not limited to, travel by air, train, bus, or car between your home and the business destination; use of your personal vehicle while on business; transportation, such as taxi or ferry; meals; hotels; laundry services; use of communication expenses such as phone, internet, computer, or fax; and many more. Travel expenses are deductible for you and any other employees of the company.
Like any other qualifying business trip, for your annual meeting to qualify as a deductible travel expense, you must spend more than 50% of an eight-hour day dedicated to verifiable business. We highly recommend sticking to a structured agenda of topics so that you stay on track.
By following these steps, you will provide excellent documentation for your corporation and ensure that your company is not placed in bad standing with your state.
To sum up, travel expenses offer you a valuable tax-saving deduction for your business that is often overlooked by business owners. But by following the rules and properly documenting your expenses you can put money right back in your pocket. At TSP Family Office, we can make even the most complex tax deductions simple for you to take advantage of. Just give us a call at (772) 257-7888 and we can walk you through all the steps to do it right and save you money for you and your business.