5.3 Travel and Entertainment Expenses

Travel and entertainment expenses can be a minefield for businesses. From qualifying business trips to meal deductions, there's a lot to navigate. But don't worry, we've got you covered with the key points you need to know.

Deductibility hinges on expenses being ordinary, necessary, and business-related. The Tax Cuts and Jobs Act changed the game, eliminating most entertainment deductions. Meals are generally 50% deductible, with some exceptions. Proper documentation is crucial to support your claims.

Deductibility of Travel Expenses

Qualifying Business Travel Expenses

• Travel expenses become deductible when ordinary, necessary, and directly related to the taxpayer's trade or business
• Deductible expenses encompass transportation, lodging, meals, and incidental costs incurred during overnight business trips
• "Tax home" concept determines expense deductibility, typically defined as the taxpayer's regular place of business or work
• Allocate expenses for mixed business and personal trips, deducting only the business portion
• Standard mileage rate calculates deductible expenses for business use of a personal vehicle as an alternative to actual expenses (57.5 cents per mile for 2020)

Special Considerations for Travel Deductions

• Specific rules govern deductions for conventions, conferences, and seminars, including those outside North America
• Expenses for accompanying spouse or dependent generally not deductible unless serving a bona fide business purpose
• Foreign convention expenses face additional limitations and reporting requirements
• Luxury water travel expenses subject to daily limits based on the highest federal per diem rate for U.S. travel ($374 per day for 2020)

Requirements for Meal and Entertainment Deductions

Meal Expense Deductibility

• Meal expenses generally 50% deductible if directly related to or associated with active conduct of taxpayer's trade or business
• "Directly related" test requires main purpose of meal to be active conduct of business, with expectation of specific benefit
• "Associated with" test applies to meals directly preceding or following substantial business discussions
• Meals provided for employer convenience may be 100% deductible under certain conditions (meals served on business premises)
• De minimis fringe benefit meals fully deductible (occasional group meals, company picnics)

Entertainment and Special Meal Situations

• Entertainment expenses generally no longer deductible under Tax Cuts and Jobs Act of 2017, with limited exceptions
• Special rules for meal expenses incurred by employees under accountable plan
  • Employer may deduct 50%
  • Employee excludes 100% from income
• Certain exceptions to 50% limitation exist
  • Meals treated as compensation to employees
  • Meals sold to customers (restaurant meals)

Limitations on Travel and Entertainment Expenses

Specific Expense Limitations

• 50% limitation applies to most business meals, including those consumed during travel
• Per diem rates substantiate lodging, meal, and incidental expenses, subject to IRS limitations ($297 for high-cost areas,$200 for other locations in 2020)
• Club dues and membership fees generally disallowed, even if used for business purposes (country clubs, golf clubs)
• Lavish or extravagant expenses not deductible, reasonableness determined by facts and circumstances ($500 bottle of wine vs.$50 bottle)

Exceptions and Special Rules

• Luxury water travel expenses subject to daily limits based on highest federal per diem rate for U.S. travel
• Foreign convention attendance subject to additional limitations and reporting requirements
• Cohan rule may allow some deductions based on reasonable estimates if records incomplete
  • Does not apply to travel or entertainment expenses
  • Example: Estimating number of business miles driven without a mileage log

Documentation for Travel and Entertainment Deductions

Record-Keeping Requirements

• Maintain adequate records to substantiate expenses, including amount, time, place, and business purpose
• Documentary evidence required for expenditures of $75 or more and all lodging expenses (receipts, canceled checks, bills)
• Contemporaneous log or diary necessary for travel expenses, recording business purpose and trip details
• For applicable entertainment expenses, record name, title, and business relationship of person(s) entertained

Documentation Best Practices

• Electronic records and scanned receipts acceptable if meeting IRS requirements for reliability and accuracy
• Retain records for at least three years from tax return filing date or two years from tax payment date, whichever is later
• Organize receipts by category and date for easy reference during tax preparation or potential audit
• Use smartphone apps or digital tools to capture and store expense information in real-time (Expensify, Concur)