Deductible Travel and Entertainment Expenses

Generally, to be deductible, an expense must be both ordinary and necessary for the business. Travel expenses, for tax purposes, are ordinary and necessary expenses of traveling away from home for your business, profession or job. Ordinary means common and accepted in your industry, trade or profession. Necessary means helpful and appropriate for your trade or business. It does not have to be required or indispensable to be considered necessary.

If the purpose meets these standards, all your travel costs are deductible: tickets for airline, taxi, bus, boat (if by luxury boat, there are special rules), tips, shipping fees (if the materials you need require special shipping), automobile, lodging, meals (subject to 50% limit), etc.

You can deduct the travel expense of someone who goes with you if that person:

• Is your employee or business associate, and
• Has a bona fide business purpose for the travel, and
• Would otherwise be allowed to deduct the travel expense

Whether you're on a trip or at home, you can deduct entertainment expenses, including meals, if they are ordinary and necessary and meet one of the following tests:

Test 1 - Direct: This test is met if the main purpose of the entertainment was business; you did engage in business; and you had more than a general expectation of getting income or some other specific business benefit. If the business discussions were just incidental to the entertainment, this test is not met. If the activity itself would make it hard to conduct business, e.g., hunting, fishing or nightclubbing, it likely does not meet the test.

Test 2 - Associated: The entertainment was associated with active conduct of your trade or business and occurred just before or after a substantial business discussion.

Entertainment includes any activity generally considered to provide amusement or recreation. Meals are considered a form of entertainment. If you entertain business and non-business individuals at the same event, you must divide your expenses between business and non-business. But spouses' expenses incurred entertaining the spouse of a qualifying business guest are deductible. Be careful about tickets to events because you generally can deduct only up to the face value of tickets purchased - unless the expenditure meets certain charitable-cause criteria.

The deductibility of entertainment expenses, including meals, is limited to 50% unless the purpose is charitable.

If you use a car for business purposes, you can deduct the expenses. You can use the standard mileage rate or the actual car expenses. If you want to use the standard mileage rate, you must have used this method in the first year that the automobile (or truck) was available for your business use.

Don't Overlook Small Deductions - They Add Up: You don't have to obtain a receipt for a deductible travel and entertainment expense under $75, but you do have to keep a record of the expense and business purpose, including time and place, individual entertained and business relationship. Over the course of a year, the small deductions can add up. For example, let's assume that you fail to deduct small expenses on 100 occasions throughout the year. Let's also assume that they average $20 each and half are subject to the 100% deduction limit and the other half are subject to the 50% deduction limit. That's $1,500 of tax-deductible expenses. Assuming your tax rate is 40%, you've overpaid your taxes by $450. Assuming you have a 5% pretax profit margin, that's the after-tax equivalent of $15,000 in revenue!

Here's the formula:

Here's the calculation:

$450 / [(1 - .40) x 5%]

$450 /.6 x .05

$450 / .03

$15,000

Split Expenses: If you have expenses that are partly for business and partly for personal, you can deduct the business part. For example, if you borrow money and use 70% of it for personal and 30% for business, you can deduct 20% of the cost of the money. The same goes for your home and auto.