For some business owners, spending money on travel and entertainment is inevitable. You might need to take a business trip or decide to take a client out for lunch. Whatever your situation, you might be able to claim travel, meals, and entertainment tax deductions.
Travel and entertainment
You can deduct certain travel and entertainment expenses come tax time. Travel and entertainment expenses are costs you incur when you travel or entertain for business purposes.
You need to know the travel and entertainment policy. What expenses are covered under travel, and which are covered under entertainment?
Travel
You can deduct travel expenses if they are ordinary (common and accepted in your business) and necessary (helpful and appropriate for your business). When you need to leave your tax home (the area you primarily work in) to travel for business, you incur expenses related to transportation, lodging, and meals.
Publication 463 says you are traveling away from home if:
- You are gone from your tax home for more than an ordinary day’s work as a result of business
- You need to sleep or rest to meet the demands of your work while traveling
The type of deductible travel expenses depends on your business and circumstances. Here are some travel expenses you can deduct:
- Transportation (e.g., airplane, train, bus, or car)
- Lodging and meals
- Cleaning (dry cleaning and laundry)
- Tips related to deductible expenses
There is a 50% limit on deducting meals. You can only deduct 50% of your meal expenses. You cannot deduct your expenses for meals if they are lavish or extravagant.
You cannot deduct a spouse’s or dependent’s expenses. You might be able to claim a business tax deduction for an employee’s travel expenses if they are necessary to the trip.
If you have an expense that covers other types of costs, you must allocate the cost between each (e.g., your hotel includes breakfast).
You can only deduct business-related travel expenses. If you decide to stay longer for vacation, you cannot deduct the personal expenses.
Entertainment
Many entertainment expense deductions were repealed following the Tax Cuts and Job Acts of 2017 tax reform. However, there are still certain entertainment expenses you can deduct.
Under the tax law, you can deduct expenses for recreational, social, or similar activities if they are explicitly for the benefit of your employees (excluding highly compensated employees). This means you can still deduct 100% of your entertainment expenses for office holiday parties.
You can categorize a meal as a form of entertainment if you or an employee is present. Meal entertainment expenses are only 50% deductible. If you claim the cost of a meal as entertainment, you cannot also claim it as a travel expense.
Entertainment, amusement, recreation, or use of a facility or property are no longer deductible expenses. This means you cannot deduct expenses for taking clients out to sporting events. And, you cannot deduct tickets to qualified charitable events.
How to deduct expenses
To deduct travel, meals, and entertainment expenses, you need to keep accurate records. According to IRS Publication 463, you must submit records that show the amount, time, place, and business purpose of each expense.
Update your small business accounting books and hold onto documents like receipts. Keep records for three years from the date you file.
For example, you could have an expense report that looks like this:
| Expense | Amount | Time | Place | Business Purpose |
|---|---|---|---|---|
| Travel | $199.00 (hotel) / $40.00 (food) | 08/09/2017-08/10/2017 | Phoenix, Arizona | To meet with Client X and discuss working together |
If you are a sole proprietor or own a single-member LLC, you need to deduct your travel and entertainment expenses on Schedule C (Form 1040), Profit or Loss from Business. Partners use Form 1065, U.S. Return of Partnership Income.
C corporation shareholders use Form 1120, U.S. Corporation Income Tax Return. S corporation shareholders use Form 1120S, U.S. Income Tax Return for an S Corporation.
You need to make sure your accounting books are accurate. We’ll help you get there. Try Patriot’s online accounting software to track your expenses. We offer free, U.S.-based support. Get your free trial today!
This is not intended as legal advice; for more information, please click here.