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Travel and Entertainment Expenses

This category includes payment for entertaining clients and employees, meals, travel by auto, air travel, baggage handling fees, taxis, hotels, parking, gifts, car rentals, taxes on these items, and other related expenses. The IRS generally allows a deduction for business-related travel and entertainment expenses; however, although employees may receive reimbursement for all their meals and entertainment expenses, only 50 percent of these amounts may be used as a deduction for business income tax purposes.

The IRS has complex and intricate rules regarding this. In IRS Publication 463, for example (Travel, Entertainment, Gift, and Car Expenses), small business owners may learn all about the precise definition of a“Bona Fide Business Expense,” “Lavish or Extravagant” meal expenses, the “Directly Related Test,” the “Associated Test,” and much more.

Further, accurate records and receipts must be kept explaining the date, business purpose, persons met, and amounts associated with each travel and entertainment expense. This is best accomplished using spreadsheets such as Microsoft Excel; however, the report must be printed and signed periodically.

In general, small business owners want to report expenses of this nature liberally to increase business expenses, reduce taxable income, and thereby reduce income tax expenses. The reality is that many small business owners consider virtually all travel and entertainment expenses to be business related. Many small businesses simply pay off the credit card of the owner and the top officers each month, and everything is wedged into one expense line item or another. As far as recordkeeping is concerned, many consider the credit card statement enough for the IRS, although this would not suffice for an audit. These companies are obviously taking the position, “If I get audited, I will explain it all, and if they don’t believe me, so what? I won’t go to jail.”

I have heard of some rather extravagant interpretations of “travel and entertainment expenses” over the years, but have never heard of a situation where the IRS challenged a small business owner for incorrectly classifying personal expenses as business-related travel and entertainment expenses.

For more information, see IRS Publication 463 (Travel, Entertainment, Gift, and Car Expenses), www.irs.gov, or call 1-800-829-4933 and receive free copies by mail.