What Every Entrepreneur Should Know About Travel & Entertainment Deductions
For many entrepreneurs, travel and entertainment (T&E) tax deductions can be a minefield. Can you take a prospect to see “Hamilton” and deduct the cost of those front-row theater tickets? If you fly your family with you on a business trip in Maui, can you deduct their airfare and hotel expenses? What if you rent a Ferrari to drive a client along the Maui coast?
Here’s what every small business owner should know about travel and entertainment deductions.
Certain expenses for business travel are deductible as long as they meet two criteria: They must be “ordinary and necessary” in the course of doing business, and they must be documented.
Ordinary and necessary expenses of business travel may include:
- Travel by plane, car, bus or train between your home and the destination
- Transportation at the destination (i.e., a shuttle ride from the airport to your hotel; a taxi trip from your hotel to the convention; the cost of a rental car)
- Actual or standard mileage costs of using your own or business vehicle for the trip
- Parking, tolls and other costs associated with use of the vehicle
- Meals (either the actual cost of the meal or the IRS standard per diem)
- Dry cleaning or laundry services
- Tips related to the services above
What about mixing business and personal travel?
You can take deductions for business-related expenses even if part of the trip includes personal vacation time. However, you can’t deduct expenses for family members accompanying you on a business trip unless there’s a business reason for them to attend.
Suppose you go to Maui for a three-day trade show and take your husband and son along, then spend two days sightseeing as a family. You can deduct your expenses for the three days of the convention, but not the personal days. You can’t deduct your family’s expenses for any part of the trip unless there’s a genuine business reason for them to attend (for instance, if your husband is working in your trade show booth).
The IRS defines “entertainment” as “any activity generally considered to provide entertainment, amusement or recreation.” This can include entertaining guests at:
- Nightclubs or bars
- Social, athletic or sporting clubs
- At theaters or concert halls
- At sporting events
- On yachts
- On hunting, fishing, vacation and similar trips
- Providing travel necessities, such as lodging, a car or other transportation, and meals to clients while they’re visiting
A business discussion doesn’t have to result in actual sales or business in order for the entertainment expenses to be deductible. However, the expenses do have to be “directly related to” or “associated with” conducting or discussing business.
Entertainment that takes place in a business setting is directly related to business. Examples include hosting a hospitality suite at an industry conference or taking a client out for dinner after a trade show. (You can deduct a meal as a travel or entertainment expense, but not both.)
“Associated” entertainment expenses are less clear-cut.
These types of entertainment typically take place in a setting not really conducive to discussing business, such as a nightclub, a theater or a sporting event.
However, if the entertainment takes place before or after a substantial business discussion, it’s generally considered associated with business. If a client has a meeting with your team on Monday, flies into town on Sunday afternoon, and you take her to a baseball game on Sunday evening, the expense of that entertainment is deductible.
Keep Good Records
Generally, travel and entertainment expense deductions are limited to 50 percent of the expense. To prove your deductions are legitimate, you must keep detailed records. It’s a good idea to record expenses on a weekly basis (more often during intense business travel). Records that are “timely kept” (that is, recorded soon after the event) carry more weight with the IRS than expenses you reconstruct a year later from memory.
When recording expenses for travel and entertainment, keep receipts, and be sure to note the amount, date, location and business reason for the expense.
Eliminate the hassle of paper receipts by using an expense-tracking app to scan, or photograph receipts with your smartphone. Look for one that integrates with your accounting and payroll software and offers reporting features to help you monitor expenses.
For More Information
IRS Publication 463 Travel, Entertainment, Gift, and Car Expenses, has more information and examples to help you understand travel and entertainment deductions. Because this area is so complex, however, be sure to talk to your tax professional. Don't have one? Check out our network of tax professionals right here in San Antonio!