As you probably already know, food and lodging expenses can be deducted when you are away from home for business purposes. This may be particularly beneficial to self-employed individuals who travel extensively. Like everything in the tax law, there are certain rules to follow. Travel, meal, and entertainment expenses must be “ordinary” and “necessary” in carrying on your trade or business and must be “directly related to” or “associated with” the active conduct of that business.
Lodging – Travel expenses are deductible only if the individuals are away from their “tax home” for more than one business day. That usually means their regular place of business.
The IRS requires that lodging expenses be substantiated by records or other evidence. Some travel expenses of less than $75 can be documented by records including diaries, logs, and expense reports, but lodging documentation generally needs to be verified with actual receipts. The lodging records must include the amount, date, and place. In addition, the reason for the trip must also be included somewhere in the documentation for the trip expenses. If meal expenses are included in the hotel bill, they must be separated out and included with meal expenses, which have limitations.
Meal Expenses – Meal expenses are deductible only if the trip is overnight or long enough that there is a need to stop for sleep or rest to properly perform one’s duties. The amount of the meal expenses must be substantiated by receipts unless the expense is less than $75, in which case it can be documented by records including diaries, logs, and expense reports. Meal expenses are deductible up to an amount not considered “lavish” (i.e., reasonable under the circumstances).
When traveling, it is not uncommon to share a meal with others and pick up the tab. Your meal is always deductible, but the cost of the other individuals sharing the meal are only deducible if actual business discussions were conducted during the meal and you can show that there was anticipation of a specific business benefit from the meal (even if the benefit does not materialize). Goodwill-generating quiet business meals “in an atmosphere conducive to business” are not deductible.
Meal expense substantiation includes the following:
- the cost of the meal;
- date, time, and place;
- business purpose; and
- names of guests and business relationship.
Instead of keeping records of the actual cost of meal expenses, a “standard meal allowance” ranging from $46 to $71 can generally be used. The standard meal allowance depends on the locality and is set by the U.S. General Services Agency (www.gsa.gov). It is also known as the federal M&IE (meals and incidental expenses) rate.
The deduction for unreimbursed business meals, regardless of the record-keeping method, is limited to 50% of the cost that would otherwise be deductible.
Traveling Companion – Sometimes a business traveler will take a companion, such as a spouse or friend, on a business trip for company. When it comes to deducting a companion’s travel costs for business, the rules are very restrictive. Generally, you cannot deduct the companion’s travel costs unless the companion is a bona fide employee of the business. This requirement prevents deductibility in most cases.
Even if your companion is an employee, his or her presence must be for a bona fide business purpose. Generally, a companion’s presence must be “necessary” to meet the bona fide purpose test, and just being “helpful” does not meet the requirement. Being there for goodwill purposes such as serving as a hostess is generally insufficient to satisfy a business purpose. An exception to that rule would be if your companion’s presence is necessary to care for a serious medical condition that you have.
If your companion’s presence does meet the bona fide business purpose rule, then the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, and lodging, and incidental costs such as dry cleaning, phone calls, etc.
But all is not lost if your companion does not meet the qualifications. You may still be able to deduct a substantial portion of the trip’s costs. This is because the rules don’t require you to allocate 50% of your travel costs to your companion. You need only allocate to him or her any additional costs that are incurred. For example, the single rate for a room is not so different than the cost for double occupancy. If you were driving, no allocation would be required because the cost would be fully deductible even if your companion did not accompany you. If you used public transportation, only your cost would be deductible. Any meals and separate costs incurred by your companion would not be deductible.
Travel expenses and documentation can be tricky. If you have any questions that may apply to your specific circumstances, please give this office a call.