For tax purposes, employment and business expenses are equally applicable to employees and the self-employed. While most job-related expenses incurred by employees are eventually reimbursed by their employer, any unreimbursed employee business expenses are still deductible after a reduction equaling to 2% of their adjusted gross income. So for either group, it’s a constant effort trying to distinguish between personal expenses and business expenses to determine which spending is qualified for a tax deduction. A big portion of the hard-to-classifying expenses involves travel and entertainment spending on alleged business trips, either for employment or self-owned business. So next time you travel to somewhere, make sure it is a business trip with some work so that you can claim legitimate tax deductions.
Travel expenses are very broadly defined. While not all inclusive, the following listed by the IRS are typical, deductible travel expenses:
- Any transportation cost traveling to and back from your business destination,
- Using of a car and incurring any other transportation costs while at your business destination,
- Meals and lodging,
- Business communication expenses,
- Incidental expenses, such as reasonable dry cleaning and laundry,
- Tips paid for services related to any of the business expenses.
Understanding travel and its related expenses in a tax context is a key to getting more spending to qualify for tax deductions. For example, an one-day business trip with no over-night resting is not considered travel status by the IRS, and thus meals for such a trip are not tax deductible.
“Record keeping is so crucial [in order to back up expenses claims],” according to a licensed IRS agent.
Records should show 4Ps and a D: the person, the place, the purpose, the price, and the date. This is especially useful when you combine a business trip and personal pleasure, as some expenses, meals and lodging in particular, must be allocated between business and personal days. However, to mix business and pleasure with travel, some tax experts suggest to arrange travel days to make weekends or holidays fall between days devoted to business, as such non-working days are counted as business days for tax purpose.
Like costs of business meals, entertainment expenses are also subject to the 50 percent cut back rule, meaning only half of the expenses are allowed as a deduction. In the case of purchasing an entertainment ticket, the cost of the ticket is limited to its face value. Any excess pay to a scalper or fee charge by a ticket agent is not deductible. Also, to qualify an outing to a baseball game with your client as a business entertainment, a business discussion must precede or follow.