Tax Tips for Business Travel Expenses
Rob Newman keeps meticulous records of what he spends on all his business trips. He charges everything on credit cards to have an electronic trail and keeps a log on Google Calendar of everything he did.
As a freelance television commercial producer who travels frequently for work, Newman can't afford not to keep receipts for every taxicab, every meal and every newspaper he buys. When April 17 rolls around, he'll be armed with enough documents to make sure he's getting every tax deduction he's entitled to — and is able to prove why.
"I have not been audited for travel expenses, but am well backed up in case I am," he says.
Newman is not your typical business traveler, tax professionals say. Most taxpayers make one crucial mistake when deducting business travel expenses on their taxes: They don't keep receipts and written or electronic logs to support their claims.
"If you want the deduction, keep the record. If you don't have the records, you're sunk," says Burton Haynes, a tax attorney in Burke, Va.
The deadline for filing 2011 income tax returns is two weeks away, and understanding which business travel expenses you can or can't deduct — and having documents to back them up — can earn you a legitimate write-off or save you in case you're audited.
"Any time these travel, meals and entertainment are audited by the IRS, they're always subjected to a higher level of scrutiny," says Gerald Kelly, a tax attorney in Columbia, Md.
There is much that business travelers can deduct, from meals to dry cleaning to computer rentals to airline baggage fees. But there are many nuances that taxpayers often don't get.
Fortunately, the IRS has many documents, or publications, at www.irs.gov to explain the laws.
When all else fails, business travelers can turn to the professionals.
"The IRS spends a lot of time and money putting together these publications, which do explain things in laymen's terms," Haynes says. "They're written for people."
If you're an employee traveling for business and your company does not reimburse you for all your expenses, you're entitled to deduct your out-of-pocket expenses above 2% of your adjusted gross income. If you're self-employed or a small-business owner, you don't have that limitation.
"For a lot of people, it's very difficult for them to exceed 2% of adjusted gross income for these expenses," says Helen Stephens, a certified financial planner in Fort Worth.
Once you've met that threshold, you can start taking deductions. Air, train or bus fare to your destination is deductible. So is the cab fare to the hotel and to and from business meetings. If you drive a personal vehicle, you can deduct actual expenses or the standard mileage rate. If you rent a car, you can deduct only the business use of the vehicle. The cost of sending baggage or presentation materials ahead of time is also deductible, as are dry cleaning, laundry, telephone calls, tips and other miscellaneous items while away from home.
Spending within reason
You can deduct 50% of your meals, either personal or while entertaining clients, but the meals can't be "lavish" or "extravagant." To complicate matters, there is no clear definition of lavish or extravagant.
"You have to be reasonable," says Abe Schneier, a senior technical manager at the American Institute of CPAs. "There's no hard and fast rule but if you make a habit of doing that kind of entertainment, ordering $100 bottles of wine, it will generate questions."
Above all, you'll have to prove that everything you deduct had a business purpose. Stephens has had many clients ask if they can deduct country club memberships because they network there, or fees for airline clubs. The answer, she says, is no.
Combining business with pleasure also creates complications. If you take a trip and spend five days sightseeing and only one day working, you can't deduct the entire trip. Any side trips are not deductible. And if you bring along a spouse or children, you can deduct only your own expenses.
Although the IRS only requires receipts for expenses above $75, Schneier recommends keeping all receipts, if only to prove where you were at any given time. "It's additional proof of where you were and when. Even a Starbucks receipt has a date and time on it," he says.
More is better
Tax professionals say record-keeping should reflect the five W's: who, what, where, when and why.
"The easiest way is to write on the back of each receipt the following; reason of the expense, name of person you met. The location and date will be in the receipt," says Vielka Burey-Jacas, a certified financial planner in Miami.
Travelers often forget to keep a log of their car trips because it can get so tedious."Your records must be contemporaneous," says Jackie Perlman, principal tax analyst for the Tax Institute at H&R Block. "That means that you're making your record at the time something happened."
Perlman recalls a couple who proudly showed off Excel spreadsheets tracking the mileage of all the car trips. Clearly, they had just copied and pasted, because each day had the same numbers. "Just because you have a lot of paper does not mean you've kept good records," she says.
If you can't substantiate your claim, you could lose the deduction and end up having to pay the tax, plus interest and a penalty. If, after recalculation, it turns out you understated your tax liability by 10% or more, you could get slapped with a 20% understatement penalty, Haynes says.
"The first rule is, don't lie to the IRS, and don't make up documents," he says.