Can I Deduct My Travel Expenses?

It's the time of year when I'll get this question...numerous times.  My firm has found itself working with several individual tax return clients who work in sales positions, and these guys are responsible for paying for travel and entertainment expenses out of their own pocket with no reimbursement in most cases.  They also have to drive their personal autos to make sales calls, which could lead them to deduct mileage expenses each year.  This is a very important deduction to those clients, and I advise them (or harass them...that could be more like it) annually about record-keeping and what is and is not deductible.  The rules are tricky and bear repeating.  You're welcome....

First of all, what is "travel?"

You're traveling away from home if your job duties require you to be away from the general area of your tax home substantially longer than a day's work, and you need to sleep or rest to meet the demands of your work while away from home.  Overnight business trips are the common example I see, or trade shows which keep you away from home for several days.  There are no travel expenses while you're driving around town making deliveries (except for mileage).

Which expenses can you deduct?

The list goes something like this....transportation, taxi cab fees, baggage and shipping, car (mileage or actual expenses, depending on the client and the circumstance), lodging and meals, cleaning (dry cleaning and laundry), telephone, tips, and of course, "other."  Other is where we get into trouble sometimes, but the definition is "other similar ordinary and necessary expenses related to your business travel."

When can you deduct meals?

You can deduct meals when it is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from  home, and/or the meal is business-related entertainment.  Remember that meals are 50% deductible in almost all cases.

Can you ever deduct a per diem instead of using actual expenses?

When your meals qualify for deduction as a business expense, you can either use the actual cost method (tallying up receipts) or the Standard Meal Allowance method.  The actual cost method is easy enough to understand, but the Standard Meal Allowance creates more questions.  Simply put, the Standard Meal Allowance option allows you to use a set amount for your daily meals and incidental expenses instead of keeping records of your actual costs.  The amount you deduct varies based on where and when you travel. IRS publishes M&IE rates (meals and incidental expense rates) and they change from year to year as they are indexed for inflation and such.  For example, in 2011, the M&IE rate for most small localities in the US was $46/day.

Do you need substantiation if you use the per diem?

You do not need receipts for the meals, but you MUST keep records to prove the time, place and business purpose of your travel where the meals occurred.

How do you keep track of your mileage?

I asked an IRS agent about this once....you need a mileage log.  Plain and simple.  You need a record of where you went, why you went there, and how far it was.  You need to keep your mileage even if you don't claim a mileage deduction on your tax return (you may claim actual expenses such as gas, maintenance, and depreciation).  The mileage deduction, when used properly, is a valuable deduction for those who qualify for it.  But, the bottom line is that without a mileage log, you'll lose the deduction under examination.  No questions.  And remember, traveling from home to your office is NEVER deductible as business travel.  The common mileage events take place in visiting clients or customers, or traveling to a business meeting away from your regular workplace.  We have mileage logs in our office, so if you ever need one, just say the word.

Lastly, when can you deduct entertainment expenses?

Entertainment is another of those fuzzy zones....when does entertainment actually occur?  Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client.  My sales clients use this one a lot.  For the entertainment expenses to qualify, the entertainment must have taken place in a business setting or else the main purpose of the entertainment was the active conduct of business, you actually did engage in business with the person during the entertainment period and you had a general expectation of getting income or some other business benefit.   This is the question I get....can I deduct a golf game with my biggest client?  If you discussed business and you expect something to come of it, then it would appear to qualify as entertainment expense.  BUT, entertainment expenses are 50% deductible, just like meals.

Those are the high points...I can tell you're excited.  But, not everything can be funny.  Sometimes we have to educate a little bit.  Seriously, though....there are so many scenarios and what-if's here just like in any other area of tax law, so each case should be assessed separately.  If you get bored, look at IRS Publication 463 (where I got most of this information) and see if you can find anything I didn't address here.  Or ask me and I'll do it for you.  Either way, make sure you keep records and pardon me if I ask a lot of questions when I prepare your taxes.  We need to get this right....