Expenses for entertaining and travel are one of the most common expenses that small and medium sized businesses have to make. They are also one of the areas of expenses that cause the most confusion and seem to have the most unexpected complications for people when filling out their tax forms. That’s because of some common mistakes people make when calculating their entertaining and travel deductions. This article will look at these common mistakes:
(1) You Can Deduct 100% of the Cost of Business Entertaining and Business Meals.
Of course you can’t. In fact, when you take a client, vendor, customer or potential partner out to lunch, dinner, social event or even drinks, you are only permitted to deduct 50% of the total spend. That 50% is the absolute limit you can deduct, regardless of whether you only spend a couple of dollars or as much as $200. So you take a client out for dinner and a sports event and spend $400 for the evening. You can claim $200 on your tax return.
(2) You Can Deduct the Cost of Your Daily Commute.
It doesn’t matter what area you work in, where your job is based or how far you have to travel to get to work. You are not allowed to put in a claim for travel that is considered to be commuting to work. Commuting is classed as a non-deductible expense. There are exceptions however. If for example you are moving heavy equipment that is part of your job, (such as large machinery or a particularly large musical instrument) then you will be able to deduct the cost of that bit of your journey. Similarly, from the moment you arrive at your job or workplace, any journey you make for the purposes of your job or your business, is immediately deductible. And lastly, if you are one of the thousands of people who work from home and you have declared your home as your place of business then any journey you make from your home for business purposes is considered deductible and not classed as a commute.
(3) There is a Limit to How Much You Are Permitted to Deduct
Actually, there is no upper limit on the amount you can claim for entertaining or travel expenses. The only stipulation really is that the money you spend on entertaining should not be ‘lavish and extravagant.’ Clearly this is open to wide interpretation. The money a high flying headhunter spends on wooing a major banker will obviously be far more lavish than the money a small law firm in a small town spends on a new client. It’s up to you and your accountant to work out whether the amount you spend on expenses is appropriate.
(4) You Need to Keep Receipts for Everything.
In fact it is not necessary to keep receipts for anything less than $75 when it comes to your travel and entertainment expenses (with the exception of hotel bills). So, if you take a client for a couple of beers then pay for them to take a taxi back to the station and it all comes to about $30 then you don’t need to keep the receipts. On the other hand it never hurts to keep them anyway, just for your own financial housekeeping and in case the IRS ever decides to doubt you!
(5) You Can’t Combine Business and Pleasure When It Comes to Travel Expenses
Under certain circumstances you can. One example would be taking your family with you on a business trip. Should you be making a business trip within the US and making a deduction for the trip, it doesn’t matter if you bring your family or partner with you, the deduction is still allowed. Obviously you could not include any additional costs for the trip as a result of your family coming with you (such as sightseeing or additional hotel rooms) but the costs of the primary reason for the journey (including travel, expenses, business hotel rooms etc) will all be deductible.
Esther is a financial blogger. She writes about everything from small business advice to financial software and from taxes to mortgages to where to find a good financing company.