Keep a Tab on Travel and Entertainment! Writing off any and every expense of business-related wining and dining used to be one of the given perks of the job.
But the rules of the write-off have gotten more complicated.More than ever, records must be detailed and expenses have to qualify.
Although computers and modern telecommunications have somewhat reduced the need for in-person contact, sometimes face-to-face is the best way to network, get the job done or close the deal. How travel and entertainment expenses are handled can have an impact on your net income, your paperwork burden, and on the tax results for you and your employees.
Travel and entertainment expenses are particularly susceptible to challenge by the IRS. However, in some instances, businesses may fail to deduct qualifying travel and entertainment expenses, or may be deducting these expenses improperly, which costs businesses money.
If you require employees to substantiate travel or entertainment expenses that are bona-fide business deductions, partial or complete advances or reimbursements are not treated as compensation income to the employee, and the advance or reimbursement is not subject to social security taxes or to income tax withholding. However, only 50 percent of any business-related meal or entertainment expense is deductible by the company, including costs of meals consumed by employees while they are traveling.
To ensure that the reimbursement is not subject to payroll and withholding taxes, the business must maintain a fairly detailed recordkeeping system. For travel, employees must submit a written statement of the time, place, destination and business purpose of the trip and the amount of expenses incurred by category (e.g., travel, meals, lodging). For meals or entertainment, the employee must submit a written statement showing time, place and cost of the event, who was entertained, and the business purpose of the meal or entertainment (if the event follows or precedes a business discussion, additional recordkeeping is required). Finally, the employee must keep and turn in to the employer documentary evidence such as receipts for all lodging expenses, and for other travel and entertainment expenses over $75.
Because the recordkeeping can be laborious, the law provides some shortcuts, depending on the type and frequency of the travel and entertainment expenses. For example, the paperwork burden and the cost of travel expenses can be decreased by giving employees a flat daily allowance (a per diem) that varies by destination to cover meals, lodging, and incidental expenses. If the daily allowances do not exceed IRS-determined maximums, they are payroll and income tax free with a minimum of paperwork; all that is required is a record of the time, place and business purpose of the travel. To-the-penny accounting of expenses and corroborating receipts is not necessary.
One simple way to cut out paperwork while boosting company tax deductions is to give employees a flat allowance for anticipated travel and entertainment, and not require these expenses to be substantiated. The allowance is fully deductible as compensation (assuming the employees' compensation packages are reasonable), and there is minimal paperwork required. The allowance, however, is subject to payroll and income tax withholding, and the company may not be able to determine what their actual travel and entertainment expenses are for budgeting purposes. In addition, there are unfavorable tax consequences for the employee, even if the travel and entertainment expenses are deducted on their own returns.
If you have questions about qualifying expenses or the method of deduction that will be most cost-effective and efficient for your business, give us a call. We can meet over lunch – and get separate checks.
You can deduct the cost of meals in either of the following situations:
You cannot deduct expenses for meals that are lavish or extravagant. An expense is not considered lavish or extravagant if it is reasonable based on the facts and circumstances. Expenses will not be disallowed merely because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts.
You can figure your meals expense using either of the following methods. Regardless of the method you use, you generally can deduct only 50% of the unreimbursed cost of your meals.
If you have one expense that includes the costs of meals, entertainment, and other services (such as lodging or transportation), you must allocate that expense between the cost of meals and entertainment and the cost of other services. You must have a reasonable basis for making this allocation. For example, you must allocate your expenses if a hotel includes one or more meals in its room charge.
If a spouse, dependent, or other individual goes with you (or your employee) on a business trip or to a business convention, you generally cannot deduct his or her travel expenses.
You can deduct the travel expenses of someone who goes with you if that person: