John Brian Fast, CPA

Solitude facilitates finding business solutions.

One benefit of travel, if it is business related, is that part of the cost of the trip is usually deductible on your tax return.  (So, schedule your business meetings somewhere nice.)

In general, taxpayers may deduct “ordinary” and “necessary” business-related expenses for traveling away from home, entertaining clients and customers, and giving gifts to customers, employees and others with whom they have a business association. An “ordinary” expense is an expense that is common and accepted in the taxpayer’s trade or business. A “necessary” expense is one that is appropriate for the business.

In addition to being “ordinary and necessary,” tax courts have held that a business expense must also be “reasonable.”

Taxpayers who travel away from home on business may deduct related expenses, including the cost of reaching their destination, the cost of lodging and meals and other ordinary and necessary expenses. Taxpayers are considered traveling away from home if their duties require them to be away from home substantially longer than an ordinary day’s work and they need to sleep or rest to meet the demands of their work. The actual cost of meals and incidental expenses may be deducted or the taxpayer may use a standard meal allowance. Regardless of the method used, meal deductions are generally limited to 50 percent of the actual expense.  Only actual costs for lodging may be claimed as an expense and receipts must be kept for documentation. Expenses must be reasonable and appropriate; deductions for extravagant expenses are not allowable.

Taxpayers who deduct travel and other business expenses must exclude personal expenses when computing their deductions and must have documentation for the expense, including statement of the business purpose, names of the persons being entertained (if applicable,) date and location.  In addition, generally only 50 percent of business meal and entertainment expenses can be deducted.

The IRS provides an optional method for employees and self-employed individuals who are not reimbursed for use in computing the deductible costs they pay or incur for business meal and incidental expenses, or, for incidental expenses only if they pay or incur no meal expenses, while traveling away from home. 

Use of the optional method described in the revenue procedure is not mandatory, and a taxpayer may use actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence for proper substantiation.

Who knew Chocolate Village was a high cost locale?

This year’s annual update to the IRS’s substantiation rules on business expenses adjusts the general federal meal and incidental expenses per diem rate for the continental United States to $59, and $65 for outside the continental U.S.  Taxpayers who use the high-low substantiation method with lodging expenses get a $258 per diem rate for high-cost locations, or $163 for other locales within the continental U.S.  Among the high-cost destinations listed by the IRS this year are Monterey, California; Bar Harbor, Maine; Palm Beach, Florida; and Hershey, Pennsylvania.