Managing Your Travel and Entertainment Expenses
By Brenda Schluter, CPA and Consultant, The Shealy Group
Despite technological innovations, face-to-face communication is still a popular way to conduct business.
No matter what your industry, at some point you will likely find yourself traveling to a meeting. That often includes getting on an airplane, staying at a hotel, renting a car – and spending more than a little on wining and dining your current or prospective business partners.
The cost of travel adds up in a hurry, and if you’re going to claim travel expenses as tax deductions, you need documentation to support them. Here are some things to remember about tracking your travel and entertainment expenses to maximize your deductions.
Make a plan
Every business that sends employees out of town should have, in writing and easily accessible to every team member, a plan for tracking and reimbursement. The plan should outline allowable expenses, how to record those expenses, how and where to record rental-car mileage, and the handling of contracts, receipts and other proof of purchase or payment. When you make a travel and entertainment expense plan for your business, make sure it’s crystal clear, enforced fairly and accounts for everything you’ll need to track for tax filing purposes.
Know the difference in plans
Do you use an accountable or nonaccountable reimbursement plan for expenses? Accountable plans indicate that employees report to the employer for the expenditures, and any excess funds advanced are returned.
Nonaccountable plans operate more simply, with the company giving the traveling employee an amount to spend on the trip but not requiring that the employee spend it in any particular way. These amounts are then treated as wages to the employee.
Rules governing reimbursements differ depending on the type of plan a company uses. Consult IRS Publication 535 for more information.
For a business deduction, there must be a business purpose for the expense. Know the “who, what, when, where and why.” Keep all receipts for meals, entertainment, tickets and travel expenses, and make appropriate notations to clarify the business purpose. If the receipt documents the spending of company money in any form, save it and file it once you return to the office.
Without proper documentation, the IRS can disallow the expense under audit.
Maintain a rolling record
The IRS requires businesses to support entries on a tax return going back three years. However, it’s a good idea to maintain a four-year record due to possible fluctuation in filing dates. Should you get audited, you’ll have all of your bases covered when it comes to backing up your company’s travel and entertainment expenses.
It’s all about documentation and consistency. Record every purchase that you and your employees make while traveling, and once back in the office, make sure expenses are organized in a manner that is adequate to summarize for your tax return and that can be easily referenced in the event that the IRS requires you to provide proof of an expense you claimed as a tax deduction.
In addition to IRS Publication 535, IRS Publication 463 also has an extensive section on travel, entertainment, gift and car expenses. Both publications can be found at www.irs.gov.