The IRS has established a more stringent set of rules for deducting meals & entertainment, travel, mileage, etc. These deductions take extra effort on the part of the taxpayer, but are well worth the peace of mind knowing you have retained adequate records should you be audited.
General Rules – Meals & Entertainment
In accordance with IRC Section 274(a)(1), in order to deduct meals and entertainment, taxpayers must support that the expenditures are directly related to a bona fide business discussion, meeting or convention.
Documentation Requirements and Deductibility
IRC Section 274(d) and Treas. Regs. Section 1.274-5 also provide for full disallowance of meals, entertainment and lodging expenses unless the taxpayer can substantiate the business purpose of the expenditure. The following details must be documented for each lodging and other expenditures in excess of $75:
- The amount of expense;
- The time and place of the meal, entertainment, etc.;
- The business purpose of the expenditure; and
- The business relationships of those in attendance.
IRC Section 274(n) applies a general 50% limitation on the deductible portion of “business related” meals and entertainment. There are, however, exceptions to this that allow for 100% deductibility. Below are some of the exceptions that allow for 100% deductibility:
- Customary employee benefit programs such as annual company outings, retirement lunches, award dinners, etc. (those events discrimination in favor of highly compensated employees would not qualify)
- Expense for food and beverages that are excludable from an employee’s gross income as a de minimis fringe benefit under IRC Section 132. Examples include:
- Breakfast served at group meetings;
- Refreshments purchased by employer for personnel or clients at meetings; and
- Nominal food and beverage provided on an occasional basis, necessitate to extend or facilitate the employee’s normal work schedule or to enable the employee to work overtime.
- Reimbursed expenses to the extent a business incurs such expense of behalf of a client/customer and there is an accounting of such expenditures
- Items available to the public or sold to customers, for example trade show costs, seminars, receptions, etc. that are open to the general public or for which customers pay for attendance
- Costs associated with various 501c organizations
General Rule – Travel
In order to claim a deduction for business use of a car or truck, a taxpayer must have ordinary and necessary costs related to one or more of the following:
- Traveling from one work location to another within the taxpayer’s tax home area;
- Visiting customers or other travel connected with necessary job functions; or
- Attending a business meeting away from the regular workplace.
It should also be noted that commuting expenses are not deductible.
The IRS has put additional emphasis on substantiation of travel deductions. Lack of adequate records and records reconstructed from invoices or other sources after the fact have been disallowed in their entirety. The use of reasonable estimates is not sufficient to stand up to IRS challenge. The IRS requires substantiation of travel, entertainment, and mileage deductions. With respect to mileage deductions, taxpayers should maintain a written log to substantiate the deduction. To claim these expenses, the IRS requires the maintenance of a daily log outlining miles traveled, designation and business purpose. We recommend the use of a formal mileage log book or use of an online calendar where the taxpayer enters the travel details and business purpose. You can print your online calendar monthly and tuck this away in a file in case you are ever audited. We have included an example below of an excerpt from an appropriate mileage log.
|03/15/2014||1:30PM||Prospect: J. Smith||Client Development||Waltham||Boston||33,389.1||33,521.4||32.3|
|04/14/2014||6:00PM||Seminar: P&C||Business Education||Waltham||Boston||33,521.4||33,571.0||49.6|
Please do not hesitate to contact us should you have any questions related to this article and how it may impact your situation.