If you took a trip already this summer, you are possibly wondering if any of the trip could be a business trip and therefore be deductible on our tax return. Now is a good time to review some of the travel rules and what can be deductible as a business expense.
The first question you need to answer is what was the intent of the trip? Was it business or personal? If it was 100% business and you kept the required substantiation, the expenses are deductible.
If it was personal, then no deduction is allowed, even if you thought about your business while you were gone or made one stop to look over a competitor’s business.
What about a trip that is both personal and business? To determine what is deductible, you look at the time spent on business compared to the time spent on personal activities. If the trip is primarily for business, then your transportation costs such as airfare or car expenses are fully deductible. Hotel and foods costs should be allocated between business and personal based on the time spent on each. Any other expenses that are needed for business can also be deducted such as taxi, telephone, computer rental, shipping, and other ordinary, necessary and reasonable expenses. For meals expense, you can take the actual cost of your meals or you can take a per diem amount based on the location of your travel. If you use the per diem method, you do not have to keep receipts, but you do need a travel or trip log that includes where you were and what the business purpose of the trip was. Also, remember in most cases only 50% of your meals will be deductible.
Can you deduct the cost of your spouse if you take him with you to take notes or help with some other business activity? No, this is no longer allowed unless your spouse is a bona fide employee or partner to the business and also has a legitimate business reason for being included in the business activity. If your spouse does not meet these requirements, then those expenses will not deductible. For hotel expense, you only need to take the cost of the room above the single rate as personal expense. With other expenses, it will be your spouse’s actual cost.
If you stay over on Saturday night to take advantage of reduced airfare, then you are allowed to count this as an additional business day, even if you enjoy some personal time and activities. Therefore, your hotel and meals would be deductible for this extra time. The reason that this is considered business is because reduced travel costs are considered a legitimate business purpose.
Travel expenses to attend a convention are deductible if it is related to your business and it will benefit your business to attend. The expenses related to going to a convention for investment, political, or social purposes are not deductible. If the convention is outside North America, then it also must be reasonable that it is being held outside of the North American area.
What if the convention is held on a cruise ship? A deduction of $2,000 per person per year is allowed as long as the ship is a US flagship and all ports of call are located in the United States or its possessions and of course, it still has to meet the requirement that is it directly related to your business.
What kind of substantiation is required? Your substantiation is very important in this area. In recent years, the IRS has become stricter regarding the substantiation for travel as well as meals and entertainment. You are required to maintain a diary, log, trip sheet, or similar record as well as receipts that would substantiate the amount, the date, the place and the business reason for the trip and the expense. You must keep a copy of the hotel receipt. It will not be considered adequate to have a copy of your credit card statement, but no receipt. I just recently went through an IRS audit with a client and the agent was adamant that the client inventory actual hotel receipts or the deduction would be disallowed. As mentioned above, if the per diem rate is used for meals, then no receipt is required. However, it is still required to have the travel log so that the time of travel can be documented. For other expenses that are under $75 except lodging, receipts are generally not required. Also, if a receipt is not readily available such as a bus fare, it is not needed.
So, that was a quick summary of the travel rule. If you did take a business trip this summer, here is hoping it was enjoyable and well documented so you not only have your memories and increased business knowledge, but all your tax deductions too!
A little more about us:
Located in West Des Moines, Iowa with a branch office in Winterset, Iowa, McGowen Hurst Clark Smith (MHCS) celebrates 70 years of extending excellent service to our clients, providing them with accounting, auditing, consulting and financial planning expertise.
Established in 1946, our staff has grown from 3 to 60 employees, making us large enough to provide our clients with a broad base of experience and resources, yet small enough to offer very personalized service—which we feel makes us stand apart from other CPA firms. In addition to the traditional services of Accounting, Tax Preparation, Audit and Business Consulting, MHC&S offers our clients specialized services including Estate Planning, Business Valuations, Cost Segregation Studies, Retirement Planning, QuickBooks Training, Financial Advisory Services, Fraud Detection and Deterrence, Business Succession Planning, Litigation Support and more.
MHCS is a member of CPAmerica International, Inc., a national association of accounting firms offering membership to only 90 firms throughout the United States. This association offers a wide pool of additional technical expertise to the members firms, as well as continuing professional education necessary to maintain the degree of excellence which MHCS feels is vital in today’s business environment.