Travel - Entertainment - Gifts
You may be able to deduct the ordinary and necessary business-related expenses you have for:
An ordinary expense is one that is common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
This publication explains what expenses are deductible, how to report them on your return, what records you need to prove your expenses, and how to treat any expense reimbursements you may receive.
Who should use this publication. This publication deals with expenses of employees and sole proprietors. Other businesses (such as partnerships, corporations, and trusts) and employers who reimburse their employees for business expenses should refer to their tax form instructions and chapter 16 of Publication 535, Business Expenses, for information on deducting travel, entertainment, and transportation expenses.
Volunteers. If you perform services as a volunteer worker for a qualified charity, you may be able to deduct some of your costs as a charitable contribution. See Out-of-Pocket Expenses in Giving Services in Publication 526, Charitable Contributions, for information on the expenses you can deduct.
Expenses fully reimbursed. You will not need to read this publication if all of the following are true.
If you meet these four conditions, there is no need to show the expenses or the reimbursements on your return.
If you do not meet all of these conditions, you generally must complete Form 2106 or 2106-EZ and itemize your deductions on Schedule A (Form 1040) to claim your expenses. See chapter 6.
If you meet these conditions and your employer included reimbursements on your Form W-2
in error, ask your employer for a corrected Form W-2.
Vehicle provided by employer. If an employer-provided vehicle was available for your use,
you received a fringe benefit. Generally, your employer must include the value of the use
or availability in your income as pay. However, there are exceptions if the use of the
vehicle qualifies as a working condition fringe benefit (such as the use of a qualified
nonpersonal use vehicle). Employers should see chapter 4 of Publication 535 for
information on fringe benefits.
A working condition fringe benefit is any property or service provided to you by your employer for which you could deduct the cost as an employee business expense if you had paid for it. A qualified nonpersonal use vehicle is one that is not likely to be used more than minimally for personal purposes because of its design.
For information on how to report your car expenses that your employer did not provide or reimburse you for (such as when you pay for gas and maintenance for a car your employer provides), see Vehicle Provided by Your Employer
Out of Town Business Travel
The purpose of this letter is to advise you of the rules for deducting the cost of your out-of-town business travel within the U.S. These rules only apply if the business conducted out of town reasonably requires an overnight stay.
The actual costs of travel (e.g., plane fare, cab to airport, etc.) are deductible for out of town business trips. Significantly, however, you are also allowed to deduct the cost of meals and lodging. Your meals are deductible even if they are "personal," i.e., not connected with business, although, as with all deductible meals, only 50% of the cost is allowed (55% for long-haul truckers, certain airline, train and bus employees, and certain merchant mariners). Additionally, no deduction will be allowed for meals or lodging to the extent the expense is "lavish or extravagant." Although this term is not defined in the tax rules, it has been interpreted to mean "unreasonable."
Personal entertainment costs on the trip aren't deductible, but business-related costs such as for dry-cleaning, phone calls, and computer rentals are.
Some allocations may be required if the trip is a combined business/pleasure trip, for example, if you fly to a location for five days of business meetings and stay on for an additional period of vacation. Only the cost of meals, lodging, etc., for the business days are deductible -- not for the personal vacation days.
On the other hand, with respect to the cost of the travel itself (plane fare, etc.), if
the trip is "primarily" business, it can be deducted in its entirety and no
allocation is required. Conversely, if the trip is primarily personal, none of the travel
costs are deductible. An important factor in determining if the trip is primarily business
or personal is the amount of time spent on each, although this isn't the sole factor.
If the trip doesn't involve the actual conduct of business but is for the purpose of
attending a convention, seminar, etc., IRS checks the nature of the meetings carefully to
make sure they are not vacations in disguise. Be careful to save all material helpful in
establishing the business or professional nature of this travel.
The rules on deducting the costs for your spouse if she accompanies you on a business
trip are very restrictive. No deduction is allowed unless she's an employee of yours or
your company and her travel is also for a business purpose.
Please call if you wish to discuss this matter further or have any questions.
GIFT OR ENTERTAINMENT
Any item that might be considered either a gift or an entertainment expense
generally will be considered an entertainment expense. However, if you
give the customer packaged food or beverages that you intend the customer to use
at a later date, treat it as a gift expense.
If you give a business customer tickets to a theater performance or sporting
event and you do not go with the customer to the performance or event, you have
a choice. You can choose to treat the tickets as either a gift or
entertainment expense, whichever is to your advantage. If you go with the
customer to the event, you must treat the cost of the tickets as an
entertainment expense.
Taxes and tips relating to a business meal or entertainment activity are included in the amount that is subject to the 50% limit. Expenses such as cover charges for admission to a nightclub, rent paid for a room in which a dinner or cocktail party is held, or the amount paid for parking at a sports arena are also subject to the 50% limit.
HOWEVER, the cost of transportation to and from a business meal or
business-related entertainment is not subject to the 50% limit.
GIFTS
You can deduct no more than $25 for business gifts you
give directly or indirectly to any one person during your tax
year. A gift to a company that is intended for the eventually personal use
or benefit of a particular person or a limited
class of people will be considered an indirect gift to that particular person or
to the individuals.
Incidental costs, such as engraving on jewelry, or packaging, insuring, and
mailing, are generally not included in
determining the cost of a gift for purposes of the $25 limit.
RECIPROCAL EXPENSES are NOT DEDUCTIBLE when a group of business acquaintances
take turns picking up each other's meal or entertainment checks without regard
to whether any business purposes are served.
Temporary Job Assignments
You recently inquired about the tax consequences of your temporary job assignment away from home.
First of all, for tax purposes, the most important question relates to the length of your stay away from home. If you are away from home for more than one year, the assignment is classified as "indefinite" (as opposed to "temporary"), and you won't be able to deduct any of your personal living expenses. On the other hand, if you are actually away for one year or less and it was realistic to expect that you would be away for one year or less, then your assignment can qualify as "temporary" (unless particular facts and circumstances indicate otherwise).
If your assignment qualifies as temporary you can deduct the personal living costs you incur while away from home. Significantly, this includes the costs of lodging and meals as long as they are not lavish or extravagant (although meals are subject to the regular rules for deductible meals which generally only allow half of their cost to be deductible). Other incidental living expenses, such as for laundry or dry cleaning, are also deductible. You can deduct the costs of trips "home", e.g., on weekends, but only up to the amount you would have spent on meals and lodging at your temporary work location had you not gone home.
These rules allow for substantial deductions in many cases, and you must be careful to meet the substantiation requirements. That is, save all receipts and documentation regarding your deductible expenses. Keep a logbook showing your costs while away from home on your temporary job assignment.
Additionally, in the event IRS seeks to make the case that your assignment was "indefinite," it's advisable to establish a record showing it was reasonable to expect the assignment would last one year or less. For example, if applicable, save any memos or documentation from your employer regarding the nature of your assignment. An explicit statement in writing from your employer to the effect that the assignment isn't expected to exceed one year could prove helpful.
Please call me if you have any questions or would like to discuss this matter further.
