August 30, 2004
Tax tips for business travel | Pointers on making sure you comply with IRS rules for deducting business travel expenses
By Michael E. Niles, Cpa
Senior manager, Berry, Dunn, McNeil & Parker, Portland
When you head away on a business-related trip, remember that most of your expenditures can be taken as tax deductions at the end of the year ˆ though not all of them. In order to claim these expenses, you will need to show receipts, cancelled checks or bills, and demonstrate that the expenses were "ordinary" and "necessary" for your business, and that they were "reasonable," too.
Sound a little too open-ended? Practically speaking, the IRS does allow for some flexibility here. "Ordinary" is something common and accepted in a field of business and "necessary" means something is helpful and appropriate to your business. Reasonableness depends on the facts and circumstances of a particular situation or event ˆ a very good reason to keep accurate records. Typical travel expenses include:
ˆ Air, rail and bus transportation
ˆ Taxi fares or other costs of transportation between an airport or station and the place of lodging, from one customer to another or from one place of business to another
ˆ Transportation from the place where the employee eats and sleeps to a temporary work assignment
ˆ Baggage charges and transportation costs for sample and display material
ˆ Meals and lodging
ˆ Cleaning and laundry expenses
ˆ Telephone and computer expenses
ˆ Tips that are incidental to any of these expenses
ˆ Other similar ordinary and necessary expenses related to travel
Many business travelers find themselves having to convince their CFO, controller or accountant that an expense was indeed necessary or reasonable at the time it was incurred. The importance of keeping good records cannot be overstated. Without adequate records, you'll have a tough time proving even the legitimate expenses.
Generally, employee business expenses are reimbursed by the employer. The most common employee expense reimbursement method is an accountable plan, which provides reimbursements, advances or allowances for business expenses that are allowable as deductions for expenses paid by an employee; requires the employee to substantiate expenses covered by the arrangement to the person providing the reimbursement; and requires the employee to return any amount in excess of the substantiated expenses.
Employees can substantiate the amount of travel, meal or entertainment expenses with actual receipts of the business expense or, if the employer elects, with a per diem rate or fixed-dollar allowance. If the employer reimburses employees for the actual amount of each expense, the employees must provide documentary evidence. However, such documentary evidence is not required for expenditures of $75 or less.
Reimbursements to an employee under an accountable plan are not considered wages. However, if the above criteria are not met, the plan is generally treated as a non-accountable plan. Other types of expense reimbursement methods include a lump-sum periodic expense or auto allowance and per diems. Lump-sum payments to employees are taxable and may be claimed as a business deduction on the employee's personal income tax return to the extent these expenses exceed two percent of adjusted gross income. All payments to employees under a non-accountable plan are treated as wages when paid.
Expenses that are extravagant or lavish, or for personal reasons, are typically not considered business expenses. Also, the expenses must be for an existing trade or business, not a startup or potential business.
In addition to travel, three other areas to consider when keeping track of business expenses are entertainment, gifts and transportation.
In each of these categories, you must keep records of certain elements, which can vary slightly depending on the type of expense. You must report the amount, the time or date(s), the location of the expense and the business purpose and business relationship, when the expense involves other people. (See chart for details.)
Additionally, each type of business expense has specifications defining whether or not it is indeed deductible. For example, travel expenses incurred during a work assignment lasting longer than a year, or expected to last longer than a year, are not deductible. Travel expenses paid during a temporary work assignment away from home, however, are deductible.
In conclusion, travelers must adhere to numerous rules in order to claim expenses from a business-related trip. By following these rules, a responsible employee can administer his or her expenses in compliance with the law, but with minimum effort.
When you head away on a business-related trip, remember that most of your expenditures can be taken as tax deductions at the end of the year ˆ though not all of them. In order to claim these expenses, you will need to show receipts, cancelled checks or bills, and demonstrate that the expenses were "ordinary" and "necessary" for your business, and that they were "reasonable," too.
Sound a little too open-ended? Practically speaking, the IRS does allow for some flexibility here. "Ordinary" is something common and accepted in a field of business and "necessary" means something is helpful and appropriate to your business. Reasonableness depends on the facts and circumstances of a particular situation or event ˆ a very good reason to keep accurate records. Typical travel expenses include:
ˆ Air, rail and bus transportation
ˆ Taxi fares or other costs of transportation between an airport or station and the place of lodging, from one customer to another or from one place of business to another
ˆ Transportation from the place where the employee eats and sleeps to a temporary work assignment
ˆ Baggage charges and transportation costs for sample and display material
ˆ Meals and lodging
ˆ Cleaning and laundry expenses
ˆ Telephone and computer expenses
ˆ Tips that are incidental to any of these expenses
ˆ Other similar ordinary and necessary expenses related to travel
Many business travelers find themselves having to convince their CFO, controller or accountant that an expense was indeed necessary or reasonable at the time it was incurred. The importance of keeping good records cannot be overstated. Without adequate records, you'll have a tough time proving even the legitimate expenses.
Generally, employee business expenses are reimbursed by the employer. The most common employee expense reimbursement method is an accountable plan, which provides reimbursements, advances or allowances for business expenses that are allowable as deductions for expenses paid by an employee; requires the employee to substantiate expenses covered by the arrangement to the person providing the reimbursement; and requires the employee to return any amount in excess of the substantiated expenses.
Employees can substantiate the amount of travel, meal or entertainment expenses with actual receipts of the business expense or, if the employer elects, with a per diem rate or fixed-dollar allowance. If the employer reimburses employees for the actual amount of each expense, the employees must provide documentary evidence. However, such documentary evidence is not required for expenditures of $75 or less.
Reimbursements to an employee under an accountable plan are not considered wages. However, if the above criteria are not met, the plan is generally treated as a non-accountable plan. Other types of expense reimbursement methods include a lump-sum periodic expense or auto allowance and per diems. Lump-sum payments to employees are taxable and may be claimed as a business deduction on the employee's personal income tax return to the extent these expenses exceed two percent of adjusted gross income. All payments to employees under a non-accountable plan are treated as wages when paid.
Expenses that are extravagant or lavish, or for personal reasons, are typically not considered business expenses. Also, the expenses must be for an existing trade or business, not a startup or potential business.
In addition to travel, three other areas to consider when keeping track of business expenses are entertainment, gifts and transportation.
In each of these categories, you must keep records of certain elements, which can vary slightly depending on the type of expense. You must report the amount, the time or date(s), the location of the expense and the business purpose and business relationship, when the expense involves other people. (See chart for details.)
Additionally, each type of business expense has specifications defining whether or not it is indeed deductible. For example, travel expenses incurred during a work assignment lasting longer than a year, or expected to last longer than a year, are not deductible. Travel expenses paid during a temporary work assignment away from home, however, are deductible.
In conclusion, travelers must adhere to numerous rules in order to claim expenses from a business-related trip. By following these rules, a responsible employee can administer his or her expenses in compliance with the law, but with minimum effort.
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