The IRS takes a strict position on travel and entertainment deductions. If you don’t follow recordkeeping requirements, the tax agency may disallow the sought-after deductions. This article explains the basic rules, lays down some guidelines for providing proper receipts, and delves into a few additional points that both employers and employees will find helpful.
If you’re reporting travel and entertainment (T&E) expenses on your tax return and you’re audited, there’s a good chance an agent will take a hard look at those items.
Often the challenge won’t be whether the expense was appropriate for the business, but whether your records meet the letter of the law. And the IRS and courts take a strict position on recordkeeping — miss one element and the deduction is most likely to be disallowed.
The rules for travel recordkeeping are slightly different from those for entertainment. For travel expenses, you’ll need records to support the:
- Cost of each separate expense for travel, lodging and meals (though incidental expenses may be totaled in reasonable categories such as “taxis” and “fees and tips”),
- Dates you left and returned for each trip and the number of days spent on business,
- Destination or area of travel (typically the name of the city or town), and
- Business purpose or benefit gained or expected.
For entertainment, you’ll need to go into more detail. You must note the cost of each separate expense, though incidental expenses (such as taxis or public transportation) may be totaled on a daily basis. You’ll also have to record the date of the event, and the name and address (or location) of the entertainment. In addition, you’ll need to describe the type of entertainment if it’s not readily apparent. For example, was it a dinner, a show or a sporting event?
But that’s not all. You must also write down the business purpose or benefit gained or expected from the entertainment. This means describing the nature of the business discussion or activity. If the entertainment was directly before or after a business discussion, you’ll have to express the date, place, nature and duration of the discussion, as well as the identities of the persons who took part in both the discussion and the entertainment.
Last, you need to record your relationship to the persons entertained. Include their occupations or other information (such as names, titles or other designations) that show their business relationships with you.
According to the IRS, you don’t need to record the elements of every expense on a contemporaneous basis. Maintaining a weekly log should be sufficient. But the longer the delay, the more dubious the log’s credibility becomes.
You generally need receipts, canceled checks, bills and the like to support your expenses. But there are three exceptions:
- You use the per diem allowance method for meal and/or lodging expenses.
- You incur transportation expenses for which a receipt isn’t readily available (such as taxis, buses or light rail).
- The expense, other than for lodging, is less than $75.
The per diem method provides for a fixed allowance based on the area to which you’re traveling. For example, Boston has one rate and Springfield, Mass., has another. While you won’t need receipts, you’ll still have to document the other elements of the expense. There are a number of other rules and restrictions, and the allowances may not fully cover your expenses.
Saving receipts for expenses less than $75 may be helpful in providing additional documentation for the date, place and type of expense. Employers should consider requiring receipts for expense reports — even if they’re not required for tax purposes.
The receipt should show the date, place and essential character of the expense. In addition, for a hotel receipt, you’ll need a breakdown of charges such as lodging, meals, phone calls and other services. For a restaurant receipt, you’ll need the date, place, amount and number of people served.
A canceled check or line on a credit card statement, by itself, is insufficient documentation. You’ll need a bill, receipt or something similar from the provider. Because many receipts are now printed on heat-sensitive paper that can fade quickly, consider making copies for your files.
There are a number of smartphone and tablet apps available that make recording T&E expenses much easier. Some can even integrate with a company’s accounting software. Just make sure any app you download or approve for employees captures all of the required IRS elements and you’ve got a backup system in place.
Many taxpayers are diligent about recording T&E expenses, and sometimes even describing the people involved, but they fall short on establishing a business purpose. This element is just as critical as the others. The amount of detail here depends on the situation. Taking an important customer to dinner after an afternoon meeting discussing and taking product orders may not need as much detail as entertaining a prospective client and discussing only theoretical sales. Keep in mind that you won’t be penalized for providing too much information.
The type of entertainment can also be important. It’s not unusual to discuss business during dinner when it’s just you and a customer. But that’s not true for a sporting event or play — particularly when you’re taking spouses along. Then you have to show the discussion took place before or after the event. And, for an expense to be classified as business entertainment, an employee must be present. Give two tickets to a basketball game to one of your good clients and it’s just a gift, subject to those rules — not a T&E expense.
What if you’re mixing business with pleasure on a trip? It’s doable, but you want to be especially careful with your recordkeeping. If the primary reason for the trip is business, you can deduct travel costs to and from the business location and expenses while on business there. But you can’t deduct nonbusiness expenses such as transportation and meals on a side trip to visit friends or family.
You also can’t deduct expenses associated with your spouse on the trip unless:
- He or she is an employee of the business, and
- There’s a clearly demonstrable business purpose for his or her presence.
Proper and Reasonable
If you’re an employee, you must provide your employer with an expense report that includes the details discussed above. And if you’re the employer, you’ve got to ensure that you’re receiving proper, reasonable documentation from employees.
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