When some people start a business, one of the first things they think is “Wow! Now I can write off that trip to Hawaii to meet with that prospect and have steak dinners every night!” Um, it isn’t that simple. You need to pass a few tests in order to be able to deduct the cost of travel, meals and entertainment.
You can deduct these costs on line 24 of the Schedule C, specifically line 24a for travel costs and 24b for meals and entertainment.
Do the costs qualify?
First, determine if you can deduct the purchase. When you refer to IRS Publication 463, “Travel Entertainment, Gift and Car Expenses”, you learn that you can deduct the costs of travel, meals and entertainment when they “are both ordinary and necessary and meet either the directly-related test or associated test.
Let’s break that down a bit.
“Ordinary” means that it is the type of expense that a normal person would expect someone in your line of business to purchase. For instance, you might expect a salesperson to take a client to a four-star restaurant. A math tutor? Not so much.
“Necessary” means that it is an expense that would be appropriate for the type of business you are in, and is helpful to having the business operate the way it should.
For the expense to be directly related, its purpose must be for the active conduct of the business, and you must have incurred it while doing business with whomever you entertained. Plus, you must have expected to gain the prospect’s business from the event.
As you can expect, associated means that the expense was for the active conduct of your business, and business discussions or activity occurred before, during, or after the activity. The best way to prove this is to keep a log listing who you met with and the purpose of the event.
Deducting travel costs
For travel costs, you can deduct the following types of expenses on line 24a :
- Air, bus and train costs.
- Hotel, motel and other types of lodging.
- Tips you give with travel-related activities (i.e., to baggage handlers).
- Laundry and dry cleaning
- Local transportation, such as shuttles, rental cars and taxis.
- Charges for faxing and Internet connections.
What if you mix business travel with pleasure?
What if you have some personal purpose included with your business travel? You will have to determine the amount of time you spent on personal and business activities. If you spent most of your time on business activities, then the trip is considered primarily business. Focus mostly on personal activities? Then it’s a personal trip.
If your trip is personal, you can still deduct the cost of expenses that would otherwise be considered business activities, but the travel expenses to and from your destination would not be deductible.
Deducting meals and entertainment
For the cost of meals and entertainment on line 24b, you can only deduct 50 percent of what you spent on business meals and entertainment. This limit applies to expenses you incur when:
- you are traveling away from home.
- you are entertaining customers at a restaurant, your office, or another location.
- you are attending a convention, reception, business meeting or a meal at a club.
The items subject to this 50-percent limit include charges for taxes and tips while you are attending a convention, reception, business meeting or a meal at a club.
There are some expenses that are not subject to this 50-percent limit. The cost of travel to and from business-related meals or entertainment are not subject to the limit. In addition, if you are a business owner and self-employed, your expenses would not be subject to the limit if:
- You incur these expenses as an independent contractor.
- Your client reimburses you in some manner for these expenses, either directly or through an allowance.
- You provide a record of expenses to your client.
So, what types of meal and entertainment expenses are deductible?
You can deduct expenses for an activity that would provide entertainment, amusement or recreation, as well as the cost of meals that you provide to a customer (whether or not they are part of the entertainment). You also can deduct meal and entertainment expenses directly related to attendance at business meetings, conventions or trade association meetings.
What types of meal and entertainment expenses are not deductive?
If you get reimbursed as an employee, you can’t deduct those expenses. Amounts spent for membership fees and dues, the use of entertainment facilities, and your spouse’s expenses are not deductible.
If you have an item that could be considered either a gift or entertainment — such as tickets to a football game — it is up to you to determine whether it is a gift or entertainment.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.