Starting Your Business/Keeping Tax Records
What are Business Expenses
Travel & Entertainment
Travel expenses defined. For tax purposes, travel expenses
are the ordinary and necessary expenses of traveling away from home for your business,
profession, or job. An ordinary expense is one that is common and accepted in your field
of business, trade, or profession. A necessary expense is one that is helpful and
appropriate to your business. An expense does not have to be indispensable to be
considered necessary. However, you cannot deduct expenses to the extent they are lavish or
extravagant.
You will find examples of deductible travel expenses in
Table
1.
Traveling away from home. You are traveling away from home
if:
- Your duties require you to be away from the general area of your tax
home (defined later) substantially longer than an ordinary day's work, and
- You need to get sleep or rest to meet the demands of your work while
away from home. This rest requirement is not satisfied by merely napping in your car. You
do not have to be away from your tax home for a whole day or from dusk to dawn as long as
your relief from duty is long enough to get necessary sleep or rest.
Tax
Home
What
are Travel Expenses
Standard
Meal Allowance
You may be able to deduct business-related entertainment expenses
you have for entertaining a client, customer, or employee.
To be deductible, the expense must be both ordinary and necessary.
An ordinary expense is one that is common and accepted in your field of business, trade,
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.
In addition, the entertainment expense must meet one of two tests:
1. Directly-related test, or
2. Associated test.
Even if you meet all the requirements for claiming a deduction for
entertainment expenses, the amount you can deduct may be limited. Generally, you can
deduct only 50% of your unreimbursed entertainment expenses.
To meet the directly-related test, you must show that the main
purpose of the combined business and entertainment was the active conduct of business, you
did engage in business with the person during the entertainment period, and you had more
than a general expectation of getting income or some other specific business benefit at
some future time.
To meet the associated test, you must show that the entertainment is
associated with your trade or business, and directly precedes or follows a substantial
business discussion.
Table
2 When are Entertainment Expenses Deductible?
Important References:
Publication
463
Travel, Entertainment, Gift, and Car Expenses