August 21st, 2012

Travel & Entertainment Deductions

Some of the most powerful deductions available to any business owner are travel and entertainment expenditures.  Those expenditures provide money back in your pocket and help “move the line” from personal to business expenses…IF they are handled properly.

Beware, travel expenses are among the most highly reviewed expenses by the IRS; whether in computer audit scenarios or live audit situations.

How do we ensure that our travel, lodging, meals and entertainment expenditures can be deducted?

1.       Establish the business purpose.  If the trip is personal, the IRS will rightly disallow the expenses as deductions.  The business purpose must be clearly established.

• The trip must be related to your business.  I am an accountant.  If I attend a seminar on how to be a better golfer, I am sure that would not qualify as business related.

• If you are attending a legitimate business conference, you must keep the conference materials; the promotional literature, the registration.  

• If you are incorporated, pass a resolution to attend the conference/event and record it in the resolution book.
  

2.       Document the expenditures.  Proper documentation is at the invoice level.  The credit card entry is not enough.  You must establish that the expenditure, even on a business trip, is business related.  For example, if you take your family to Orlando for a conference and everyone visits Disney World while you are there, the Disney World expense will not be treated as a business expense by the IRS; that expenditure is personal.  To properly document the business purpose, write the business purpose on the receipt.  If you tore a hole in your shirt and you need a new one, write down why you are buying a shirt (normally a personal expense) and treating it as a business expense.

3.       Be modest, not excessive in your expenditures.  Do not rent a Ferrari when a Ford will do.  The IRS will rightly disallow excessive, unnecessary expenditures.  You do not have to eat at McDonald’s every meal.  But, if you are going to Ruth Chris every night, you better have a good reason.  Just be reasonable and document, document, document.

There are other issues, but these are the big ones.  If you do these things, most of the time your expenses will be accepted.

Call me with any other questions.  Thanks and God bless.

Ralph Eldridge, CPA
The Eldridge Group
765.827.1040