Have you ever treated a client to a business lunch or had to travel away from home to meet a client? Most people know that travel and entertainment expenses are deductible, but don’t understand all the rules and regulations around it.
The easiest way to handle travel and entertainment expenses is by scanning your receipts into a software such as QuickBooks. It’s easy to do, and that way all of your deductible expenses will be in one place, making them much easier to handle come tax season.
To help you understand how to properly deduct travel and entertainment expenses, we will discuss the following topics:
- What Kinds of Travel Expenses Can you Deduct?
- What Travel Expenses are not Deductible?
- What Kinds of Entertainment Expenses Can you Deduct?
- What Entertainment Expenses are not Deductible?
- What Tax Form Do You Need to Use?
- What Kind of Documents Should you Keep in Case of an Audit?
What Kinds of Travel Expenses Can you Deduct?
Expenses that you incur while traveling for business are deductible if they are ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business.
For example, if you were a franchisor who wanted to attend a franchise expo in hopes of making some connections and learning the latest industry trends, this would likely be considered an ordinary and necessary expense. It probably would not be an ordinary and necessary expense to rent a Porsche to get around while you’re at the expo.
We have provided some examples below of travel expenses that you can generally deduct:
You can deduct the cost of airfare, bus fare, train fare, or rental car to your business destination. If you did not drive your personal vehicle then you can deduct the transportation costs of traveling to and from your hotel as well as to and from a client’s office or a business meeting place. This includes but is not limited to payment for:
- Uber/Lyft drivers
- Commuter train or bus
- Hired towncar/limo driver
If you drive your personal car to your business destination, then you can deduct any expenses for operating and maintaining your car while traveling for business. There are two ways to take this deduction: calculate actual expenses, or take the standard mileage deduction.
You can calculate your actual expenses by totaling your receipts for your actual expenses like gas, tolls, and parking. Alternatively, calculate the total miles driven round trip and multiply it by the standard mileage deduction which is currently 57.5 cents per mile. Compare the total of your actual expenses to the standard mileage that you calculated and take whichever gives you the largest deduction.
Baggage and Shipping
If you tend to check your luggage, then you will be happy to know that you can deduct those baggage fees that most of the airlines will charge you. You can also deduct the cost of shipping business supplies or materials to your destination ahead of time. For example, if you are attending a convention and you have materials that you need to set up for a booth, you can deduct the cost of shipping those items to the convention location ahead of time.
If your business trip is overnight and you need to stay in a hotel, you can deduct your hotel room and taxes for the length of your stay for business only. For example, if you attend a 3 day convention, but you want to stick around for the weekend to see the sights, then you can deduct your hotel cost for 3 days. The remainder of the trip is for personal reasons and therefore not deductible.
You can deduct 50% of the cost of meals while traveling as long as they are not “lavish or extravagant,” according to the IRS rules. An expense is not considered lavish or extravagant as long as it is reasonable. If you would dine at a restaurant even if it were not a tax deduction, then I think it’s safe to say this is reasonable.
If you are on a long business trip and find that you need to have your clothes laundered, you can deduct this expense.
Nowadays, most of us have cell phones that we use for business calls. However, if you do use the telephone in your hotel room or you need to use their fax services, you can write the cost of both of these off.
Any tips that you pay during your business trip are deductible. This includes, but is not limited, to cab drivers, bellhops, and curbside service at the airport. This can be a tricky expense to keep track of. However, what I used to do when I travelled for business is set aside a certain amount of cash in an envelope and each time I gave out a tip, I would write down on the back of the envelope the amount of the tip and who I gave it to. (i.e. $5-cab drive to airport)
There are other miscellaneous expenses that you may incur while traveling that are deductible. For example, if your hotel charges a fee to use their wi-fi in your hotel room, that is deductible. Also, If you need to use a computer or printer at the hotel’s business center, any fees that they charge for this service are also deductible. We have covered the most common travel expenses you can deduct in this article, but to see a complete list of other travel deductions, check out IRS Publication 535.
What Kinds of Travel Expenses are Not Deductible?
You are not allowed to deduct any travel expenses for a trip that is primarily for personal reasons like a vacation in the Caribbean. However, you can deduct any expenses you have while at your destination that are directly related to your business. For example, if you attend a professional seminar while on vacation you can deduct any registration fees and other costs directly related to your business.
If a spouse, dependent, or other individual goes with you on a business trip, you generally cannot deduct his or her travel expenses unless they are an employee or a business associate and meet both of the following criteria:
- They have a bona fide business purpose for the travel; and
- They would otherwise be allowed to deduct the travel expenses.
If they do not meet these criteria, then you are not allowed to deduct any meals, transportation, or other expenses for a companion during the trip.
What Kinds of Entertainment Expenses Can You Deduct & How Much?
To qualify as a deduction, expenses that you incur to entertain a client, customer, or employee must be ordinary and necessary similar to travel expenses.
A couple of examples of this would be buying tickets to the theater and giving them to a customer or throwing a Christmas party for employees at a hotel or restaurant.
In addition to the ordinary and necessary requirements, entertainment expenses must meet one of the following tests to be deductible:
1. Directly-related Test
- Entertainment must take place in a clear business setting. For example, a conference room in your office would qualify as a business setting; and
- The main purpose of entertainment is the active conduct of business and you did engage in business with the person during the entertainment period, and you had more than a general expectation of getting income or some other specific business benefit. For example, if you took a potential client to a country club where you discussed business while you played a round of golf together in hopes of bringing them onboard as a new client, that would likely satisfy this test.
2. Associated Test
- Entertainment must be associated with your trade or business; and
- Entertainment must occur directly before or after a substantial business discussion
For example, a hotel owner who does wedding events might offer a couple who is considering their services a free dinner and overnight stay in hopes of the opportunity to plan their wedding and reception. As long as the hotel staff meets with the couple to discuss their wedding packages sometime during their stay, this would qualify under the associated test.
50% Limit on Entertainment Expenses
In general, you are allowed to deduct 50% of all eligible entertainment expenses. The 50% limit applies to entertainment expenses you have while entertaining customers or employees at your place of business, a restaurant, or another location. It also includes attending a business convention or reception, business meeting, or a business lunch at a club.
Here are a few examples of what types of expenses qualify for the Entertainment deduction:
- Nightclub – You can deduct the cover charge and food & beverage
- Cost of theater tickets that you give to your client or employee
- Sporting events – You can deduct the purchase of tickets (as long as they are not lavish skybox tickets) and food & beverage
What Entertainment Expenses are Not Deductible?
In general, you cannot deduct dues (including initiation fees) for membership in any club organized for business, pleasure, recreation, or other social purpose. For example, dues paid to country clubs, golf clubs, and airline clubs would not be deductible.
This rule applies to any membership organization if one of their main purposes is either:
- To conduct entertainment activities for members; or
- To provide members or their guests with access to entertainment facilities.
Similar to travel expenses, you are not allowed to deduct any Entertainment expenses for a spouse, family member, or other individual unless you can show you had a clear business purpose, rather than a personal or social purpose, for providing entertainment.
What Tax Form is Used to Deduct Travel & Entertainment Expenses?
Below, you will find a table that shows the tax form that you can use to report Travel and Entertainment expense deductions based on your business entity. If you are not sure which business entity is right for you, check out our Best Business Structure article to learn more.
Tax Forms for Deducting Travel & Entertainment Expenses
|Business Entity||Tax Form|
|Sole proprietors, LLCs (Single-member), Self-employed||Schedule C - lines 24a (Travel Expenses) and 24b (Meals & Entertainment)|
|Corporations, LLCs (Multi-member)||Form 1120 - Other deductions line|
What Kinds of Documents Should You Keep in Case of an Audit?
In general, you must have written documentation, such as receipts, cancelled checks, or bills to support your expenses. Your documents must show the amount, date, place, and what the expense was for. For example, a restaurant receipt is enough to prove an expense for a business meal if it includes the following info:
- Name and location of the restaurant
- The # of people served
- The date and amount of the expense
On the back of the receipt, I recommend that you jot down the name of each person in attendance or at least the name of the client. I also recommend that you get into the habit of scanning receipts into your computer. After a period of time the ink on receipts starts to fade, which makes the receipt hard to read.
Accounting software programs like QuickBooks Online, which is our recommended software for small businesses, allow you to attach scanned receipts to transactions so that they are easily accessible when you need them. To learn more about QuickBooks Online, check out our free QuickBooks Online course.
A question that business owners typically have when it comes to documentation is how long do you need to keep these records. In general, you should keep records that support your deductions for 3 years from the date you filed the income tax return on which the deduction was claimed.
I realize that the tax laws can be a bit overwhelming and even intimidating to a business owner who has no accounting background whatsoever. However, I would like to encourage you not to shy away from taking legitimate business deductions. To help you gain a better understanding of what tax deductions your business is eligible for, take advantage of one of these resources:
- Check out our Top Business Tax Savings Tips article.
- Check out the IRS video portal. You will find a section dedicated to small businesses. This library includes over a dozen videos, including Small Business Taxes: The Virtual Workshop.
- CPA or Tax professional – If you have a tax professional who does your taxes each year, that is the best person to ask your tax questions. The fee that you pay to them is not just so they can complete your tax returns but to provide you with tax advice based on your specific situation.
- Ask us – You can leave a question or comment below this article. We can’t give you tax advice, but we can definitely point you in the right direction.