Some business professionals are aware of the deductions associated with business expenses and tax credits, but some other miscellaneous transactions may be off their radar. Meals, entertainment, and travel expenses can seem like part of the business with no tax benefits. However, they can be great ways to save on your return.
To understand how these expenses can benefit your return, let’s start with the definition of each.
“…the ordinary and necessary expenses of traveling away from home for your business, profession, or job.” (Source: https://www.irs.gov/taxtopics/tc511)
This deduction may not include your private jet expense to Hawaii, even if you conduct business while on your trip. Expenses that are lavish, extravagant, or for personal use you should not include.
Home can also be considered a fairly vague term but defined as the city you reside. Maybe you live in a remote area, and any time you leave your home, you are traveling to a new town. Perhaps you live in Los Angeles, and it takes two hours to drive across town. Either way, it is up to you and your preparer to make that distinction, potentially needing to defend it to the IRS if need be.
Lastly, when business travel expenses and personal expenses are combined, the entire amount may not be deductible. For example, let’s say an employee travels out of town to visit with a client. This employee brings their spouse and spends a few extra days on vacation. Not all of the expenses incurred are deductible, but the costs and percentages associated with the employee’s business are allowed.
“taxpayers may deduct 50 percent of an otherwise allowable business meal expense if…” (Source: https://www.irs.gov/pub/irs-drop/n-18-76.pdf) the following apply:
- it is ordinary and necessary
- not lavish or extravagant
- the taxpayer or employee of the taxpayer is there when the food or beverage is being provided
- the items are provided to a potential or current business customer, client, consultant, or similar business relationship
- the food is separate from what would categorically be considered entertainment
Meal expenses can be a great way to treat your employees while obtaining a tax deduction. The deduction can be great news for some companies that provide meals to their employees on a regular basis. As long as it falls within the guidelines mentioned above, you are free to deduct.
No longer deductible.
We listed entertainment expenses because before 2018 up to 50% of business entertainment expenses were deductible. This deduction has now been removed, only allowing meals and travel deductible in this category. (Source: https://www.irs.gov/newsroom/irs-issues-guidance-on-tax-cuts-and-jobs-act-changes-on-business-expense-deductions-for-meals-entertainment)
Need help remembering your meal and travel expenses incurred over the last year? Check out our Meals, Entertainment, and Travel Deductions Checklist to help jog your brain on common expenses you may include.
It is common for clients to wonder if their meals or travel deduction is allowed. The rules can sometimes appear a bit grey or your situation may not seem lavish to you. We have created a checklist of some everyday items small businesses experience and may or may not deduct. This list does not include every possible expense, merely a way to help enterprises consider where they may have incurred travel or meal expenses.
Please note, these are general points, and it is always best to confirm applicability with your tax preparer.
- The CEO travels to another country for a week to check in on an issue with their manufacturing. While abroad the CEO spends a day or two sightseeing. A percentage of the expenses are deductible.
- An employee takes the subway across town to visit with a client.
- An employee spends the day at a client site and does not finish until late in the afternoon. They are tired, and the drive is long, so they stay in a hotel for the night.
- An employee will be traveling out of town and staying at a hotel to assist a client for a set period.
- An unemployed individual drives out of state and stays at a hotel while visiting with a potential employer.
- The head of IT travels to a convention. The convention deals with security updates relevant to their industry.
- The cost of a taxi from the airport to hotel for a business trip.
- The cost of shipping materials for a special presentation.
- The cost of laundry or dry cleaning because an employee spilled coffee on their suit.
- An employee travels abroad and is required to purchase a specialized phone plan.
Travel Not Allowed:
- A lawyer goes on a family vacation and meets a potential client while at a theme park. The potential client ends up using the lawyer’s services due to their meeting.
- An employee that typically drives 15 minutes to work drove an hour due to a car crash.
- An employee’s family lives in California, but the employee works in Texas. The worker rents out a room during the week and travels home on the weekends.
- The cost of parking at a client’s place of business that is later reimbursed.
- An employee leaves for a couple of hours to visit a sick relative, and they return to work later that day.
- An employee is visiting with a client and needs to schedule a hotel. They book a suite at the most expensive hotel in town.
- An employee uses the company car to drive his family to grandmas.
- An employee’s car breaks down so he or she must rent a car to get to work.
- An employee brings their spouse on a business trip. The spouse uses the laundry service at the hotel for their personal clothes.
- An employee uses optional valet parking when attending an out of town business meeting.
- A dinner to talk with a potential client at a popular restaurant. The restaurant prices are high but considered average in the area.
- Lunch provided to employees as a perk.
- Breakfast included during employee training days.
- An unemployed individual visit’s another state for a few days to interview with a potential employer. The unemployed individual’s meals while traveling are all allowed.
- An employer keeps frozen meals in the kitchen for employees that work late.
- An employee takes out a potential client, but the client refuses and does not even finish their dinner.
- A business just closed their audit and went out to dinner to celebrate. The manager orders a few bottles of wine for the table.
- An employee buys coffee and bagels for the entire office on the way to work. He uses the company card.
- A business purchases ice cream as an office treat. All the ice cream melted when it arrives, and the employees end up throwing it out.
- Out of town employees finish late at the client’s site. They try to find an open restaurant, but the only option that appears available is the high-end steakhouse across the street.
Meals Not Allowed:
- An employee works at a restaurant and uses their employee discount to pay for a meal at that restaurant while on a break.
- Employees go bowling for the evening and dinner is included. The meal can be included if the business can provide information on the expense of the meal separate from the cost of the entertainment. Only 50% of the meal will be deducted.
- An employee takes a potential client out for a very nice dinner. The bill results in nearly a thousand dollars for two people.
- A new restaurant opened up across the street, and they bring over free meals as part of a promotion.
- As part of an office outing, employees go to dinner and a show. The entertainment includes dinner, but there is no way to show the separation of costs between meals and entertainment.
- The CEO just signed a significant client and is taking his CFO out to dinner. They visit the most expensive restaurant in town and order the whole menu on the company card.
- An employee takes his family out to dinner but ends up spending the entire meal on a business call.
- An employee buys coffee and a bagel for himself on the way to work. He uses the company card.
As mentioned, entertainment is no longer considered a deductible business expense. Businesses that provide entertainment with meals will need to show how much the meal costs within the total entertainment amount. Only then can the meal be deductible.
This publication is designed to provide information of federal tax and accounting laws and/or regulations. It is presented with the understanding that the author is not rendering legal or accounting services.
This text is not intended to address every situation that arises or provide specific, strategic tax and/or accounting planning advice. This text should not be used solely to answer tax and/or accounting questions and you should consult additional sources of information, as needed, to determine the solution to tax and/or accounting questions.
This text has been prepared with due diligence. However, the possibility of mechanical or human error does exist and the author accepts no responsibility or liability regarding this material and its use. This text is not intended or written by the practitioner to be used and cannot be used by a taxpayer or tax return preparer, for the purpose of avoiding penalties that may be imposed.
Kristen Corey is a staff accountant at Green Ledger CPA operating out of Wichita Falls, Texas. She has a Masters and Bachelors in Accounting with experience in both the accounting and marketing space, giving her a unique understanding of what information clients need most. When she isn't calculating, she is playing fetch with her dog or traveling with her husband.