Travel expenses are a favorite deduction of many clients,
because they love to travel and especially enjoy it when
the IRS is subsidizing part of the expense. In order to
deduct travel expenses, however, you must show that the
expense has a business purpose and is ordinary and
necessary to the business.
Travel expenses that have a business purpose include:
- Meeting customers/prospects/vendors residing in a
different location;
- Searching for investment property;
- Meeting with business partners, both current and
prospective; and
- Holding annual shareholder meetings (usually held in
conjunction with an annual board meeting).
The phrase "ordinary and necessary" generally is defined to
mean, "in the ordinary course of business" and that "the
expense will contribute to the success of the business."
If a taxpayer travels to a destination and while at such
destination engages in both business and personal
activities, traveling expenses to and from the destination
are deductible only if the trip is related primarily to the
taxpayer's trade or business.
If the trip is primarily personal in nature, the traveling
expenses to and from the destination are not deductible
even though the taxpayer engages in business activities
while at such destination. Expenses while at the
destination which are directly related to the taxpayer's
trade or business are deductible even though the traveling
expenses to and from the destination are not deductible.
Whether a trip is related primarily to the business or is
personal depends on the facts and circumstances in each
case. The amount of time during the period of the trip
that is spent on personal activity compared to the amount
of time spent on business is an important factor in
determining the deductibility of the travel expense.
Generally, if business is conducted more than 50% of the
time in an eight-hour business day, the travel expense is
deductible.
Travel expenses incurred on behalf of a spouse, dependent
or other individual accompanying the taxpayer are not
deductible. However, if the spouse, dependent or other
individual is an employee of the taxpayer or there is a
bona fide business purpose, then the travel expense is
deductible.
Travel expenses involving a cruise ship typically are not
deductible. However, they can be deductible if you are
attending a convention on a cruise ship and you can show
that attendance benefits your trade or business. No
deductions for cruise ship expenses are allowed for
meetings related to personal investments, political causes
or other purposes.
There are additional restrictions relating to cruise ship
travel. For example, there is a $2,000 annual limit on
cruise conventions and you must attach a written statement
to your tax return that includes certain facts about the
convention.
Normally, expenses require simple documentation such as a
receipt. However, travel expenses require additional
documentation. If the IRS finds the taxpayer does not have
sufficient documentation, the expense will not be
deductible. The taxpayer must document the amount, time,
place and business purpose of the travel expense.
Sufficient documentation of a business expense includes
receipts, cancelled checks or bills. Although a
contemporaneous log is not required, we normally recommend
that our clients keep an itinerary of the business trip
listing all business activities as documentation of the
travel expense. The log should list all elements of the
expense (e.g., amount, time, place and purpose) as this has
high credibility with the IRS. Documentary evidence, such
as receipts or paid bills, is not generally required for
expenses that are less than $75. However, the IRS has
ruled that all lodging expenses must be documented.
The taxpayer may deduct a standard allowance as set by the
federal government. This is called a per diem deduction.
In lieu of receipts, taxpayer will deduct the per diem
rates. Per Diem travel expense deductions are not allowed
for owners.
Good news for those who hate keeping track of all of those
pesky receipts when they travel. The IRS will allow you to
deduct your meals and incidental expenses for travel away
from home even without receipts. This is their Per Diem
Allowance program.
The way it works is that the IRS has a table indicating the
amount of deduction you can take on a daily basis for meals
and incidentals while traveling away from home. If you
choose to use this flat, per diem amount, you do not have
to keep track of the receipts for these expenses. If you
are not an owner in the business, you can even use the per
diem method for travel and lodging. Owners can only use
the per diem method for meals and incidentals.
Of course, per diem allowances, like deductions for actual
expenses, may be used only if the time, place and business
purpose of the travel are substantiated by adequate records
or other evidence.
The IRS has issued per diem rates based upon the
Continental United States ("CONUS") travel and foreign
travel. New CONUS per diem rates become effective on
October 1 of each year, and remain in effect through
September 30 of the following year. Federal rates are on
the Internet at http://www.gsa.gov/.
If employee expenses are substantiated using a per diem
amount, and reimbursement exceeds the relevant federal
rates for that type of allowance, then the employee is
required to include the excess in gross income. The excess
portion must be reported on the employee's W-2 and is
subject to withholding. However, as long as the
reimbursement amount does not exceed the relevant federal
rates, then the amount is not taxable to the employee!
Other technical rules apply to using per diem rates. Be
sure to work with your CPA to make sure you are following
all of the technical rules before using the per diem method
for documenting travel expenses.
----------------------------------------------------
Tom Wheelwright is not only the founder and CEO of
Provision, but he is the creative force behind Provision
Wealth Strategists. In addition to his management
responsibilities, Tom likes to coach clients on wealth,
business, and tax strategies. Along with his frequent
seminars on these strategies, Tom is an adjunct professor
in the Masters of Tax program at Arizona State University.
For more information please visit
http://www.provisionwealth.com
No comments:
Post a Comment