If you ever want to see a movie that will teach you a ton of great lessons about tax perks for the business traveler, you need look no further than, “Trains, Planes & Automobiles.” Let’s just hope on your next business trip that your flight is not cancelled, your train doesn’t break down or your rental car doesn’t catch on fire. Obviously you have enough on your plate to worry about so to keep things simple, here are some of the ins and outs of small business tax deductions for the good and the not so good business trips.
Food & shelter
Food and lodging expenses may be deducted when you’re away from home for business purposes. Like everything in the tax law, to be tax deductible there are certain rules to follow and the individuals that know the rules and keep good records get the most out of these deductions.
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.
- Keep good records of travel expenses.
- Maintain the records on a regular 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.
- 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 your 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 your duties. The amount of the meal expenses must be substantiated, but instead of 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 above, the incidental costs incurred on a deductible trip such as laundry, dry cleaning, phone calls, baggage handling, and so on 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). That’s why it’s to an employee’s advantage 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 accompanies the taxpayer on the business trip, unless the:
1. Spouse or dependent is an employee of the taxpayer.
2. Travel of the spouse, dependent or employee is for a bona fide business purpose.
3. Expenses would otherwise be deductible by the spouse, dependent or employee.
The law allows a deduction for the single rate for lodging and usually there’s no rate difference between one and two occupants, so as a result the entire lodging expense for an accompanying spouse will virtually be deductible. When traveling by car, the law does not require any allocation because the spouse is also traveling in the vehicle. So if you were traveling by vehicle, the entire cost of the transportation would be deductible. That would generally also apply to taxis at the destination. The only substantial cost that is not allowed is the cost of the spouse’s meals, which, even if they were deductible, would be reduced by the 50% rule. If you were traveling by plane, train or automobile, the cost of the spouse’s tickets also would not be deductible.
While tax deductions are usually complex and confusing, having a better understanding of them and their limitations will only help you run your business more efficiently and allow you to make better financial decisions. Take the time needed each month to do your research or bring in outside help to understand your transactions. This ensures you’re not missing out on or misunderstanding your business expenses and potential tax deductions or credits.
Note: There are general tips and should never take the place of personalized advice from a tax accountant or CPA.
This guest post is brought to you by TaxAlli.com, we pair you with real life accountants and use cloud software to make small business accounting awesome.
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