● Automobile Expenses
● Travel Expenses
● Meals & Entertainment

Caution!
Transportation expenses are a red flag for the IRS. These are the number-one item that IRS auditors look at when they examine a small business tax return. Transportation expenses can be substantial and many taxpayers are tempted to overstate them.  The IRS looks carefully to make sure that taxpayers have proper documentation. Taxpayers need to keep good records to support their deductions. This usually is something no tax preparation program or accountant can do for you, rather you must develop good recordkeeping habits and follow them faithfully to stay out of trouble with the IRS.

You must meet additional recordkeeping requirements for local transportation, travel, meal, and gift deductions, as well as for certain long-term assets that you buy for your business.

You can meet the basic requirements by keeping the following types of documentation:

  • Prove the amount of money spent
  • Canceled checks
  • Sales receipts
  • Account statements
  • Credit card sales slips
  • Invoices, and
  • Petty cash slips for small cash payments.
  • The date and place (for example, the name and address of the restaurant)
  • The business purpose or the business benefit expected to be derived from it.
  • The business relationship of the people sharing the meal with you (their names, occupation, etc)

 

If you use a car or another vehicle for business purposes, you’re entitled to take a deduction for gas and
other automobile expenses. You can usually either deduct an appropriate percentage of the actual cost of your these expenses or take the standard mileage rate deduction based on the number of business miles you drive.  The tax election to use the standard mileage rate must be done during the first year of business use of the vehicle you are forever foreclosed from using that method for that vehicle.

If you use the standard mileage rate the first year, you can switch to the actual expense method in a later year, and then sometimes switch back and forth between the two methods after that. For this reason, if you’re not sure which method you want to use, it’s a good idea to use the standard mileage rate the first year you use the car for business. This leaves all your options open for later years.

However, this rule does not apply to leased cars. If you lease your car, you must use the standard mileage rate for the entire remainder of the lease period if you use it in the first year. Also be aware that if you switch to the actual expense method after using the standard mileage rate, you’ll have to reduce the tax basis of your vehicle by a portion of the standard mileage rate deductions you had already received. This will reduce your depreciation deduction.

In any event, you need to maintain contemporaneous records showing:

  • Your mileage (both the total miles driven during the year and the business portion of those miles)
  • The dates of each of your business trips
  • The places you drove to for business, and
  • The business purpose for your trips (and who you met with when you were there).

 

Business Use of a Car
If you use your car, SUV, or some other vehicle in your business, you are entitled to certain tax deductions for expenses incurred in connection with the vehicles.

If the vehicle is used exclusively for business purposes, you may generally deduct the full cost of operating the vehicle. If you use a vehicle for business on a part-time basis, you will need to allocate your expenses based on your business and personal usage.  As an alternative to deducting actual costs and depreciation, you may deduct a standard amount per business mile driven and accounted for. See the annual rates here.

But what, exactly, is “business use of a car?” Generally, the IRS classifies all car usage into three categories:

  1. business.
  2. commuting.
  3. personal.


“Business use” generally means travel between two business destinations, one of which may include your regular place of business. Typical travel expenses that are deductible include expenses for:

  • travel from one job to another job.
  • travel from one customer or client to another customer or client.
  • travel from your office or business location in order to perform business tasks, such as to pick up supplies and inventory, to check your business post office box, or to make a bank deposit.


In addition, if you have a regular place of business, the cost of traveling between your home and a temporary work site that is not the regular place of business is deductible, regardless of the distance traveled. A temporary work site is a place where an individual is realistically expected to perform, and does perform, services for less than a year.

Also, if you do not have a regular place of business and you travel outside of the metropolitan area in which you work to a temporary work site, you are allowed a deduction for your travel costs. Travel within your metropolitan area is not deductible.


Commuting expenses
Vehicle expenses incurred in commuting between your home and your main or regular place of business are nondeductible expenses. This is true even if you have an advertising display on your car, or you use the commute to listen to business books on tape or to phone your clients, unless you have a valid business/tax purpose for the car being parked at your home to begin with. For example: driving your car 100 miles from a business location back to your hometown, parking it by the side of a busy highway where the advertising display on the car is seen by thousands of daily commuters, and then walking two blocks to your home, may be a valid business trip.


Travel from a Home Office
If you work out of your home and your home is your principal place of business, you can generally deduct the cost of traveling from home to any business destination. This is true whether the destination is another regular place of business, a temporary place of business (such as a client or project location), or a destination such as a bank, post office, supplier, etc. See Rev. Rul. 99-7 Holding (3).

If you are a real estate agent and you maintain your principal place of business in your home, you can deduct the expenses that you incur in traveling between your home and the houses you’re trying to sell.

Whether your home is your principal place of business is determined under the same standards that apply to home office deductions. If your home doesn’t qualify as your principal place of business, you must follow the general rules in determining whether a particular car trip is sufficiently business-related to be deductible.

In Powell, TC Memo, 2016-111 the general or estimated mileage was denied, but the mileage with a precise and meticulous log showing exact miles driven, exact destination and the specific business purpose for the trip, were allowed as a tax deduction on their tax Form 1120S.

Reg. §1.274-5T(c)(3)(ii)(C), Example (1), allows that for certain situations the log need only be maintain for three months per year.

Excel templates: Mileage log A | Mileage log B | Mileage log C | Mileage log D | Mileage logger equipment

 

 

 


Lodging
The Internal Revenue Service has identified an emerging issue regarding individuals who receive free or reduced rent in exchange for providing security or other services at apartment or residential housing complexes. The value of the free or reduced rent is not being reported as income when required.

In general, the fair market value of the reduced or free rent should be recognized and reported as income under Internal Revenue Code § 61 which defines gross income. This means the apartment or housing complex owner (employer) should include the value of the free or reduced rent in the employee’s gross wages on Form W-2, Wage and Tax Statement, at the end of each year.

For the value of free or reduced rent to be excluded from income the conditions outlined in Internal Revenue Code § 119, Meals or Lodging Furnished for the Convenience of the Employer, must be met. IRC § 119 states:
(a) Meals and lodging furnished to employee, his spouse, and his dependents, pursuant to employment.

There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if —
(1) in the case of meals, the meals are furnished on the business premises of the employer, or
(2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.

In addition, Regulations § 1.119 (b) Lodging state:
The value of lodging furnished to an employee by the employer shall be excluded from the employee’s income if three tests are met:
(1) The lodging is furnished on the business premises of the employer
(2) The lodging is furnished for the convenience of the employer, and
(3) The employee is required to accept such lodging as a condition of his employment.

Only under the provisions outlined in IRC § 119 may the value of the free or reduced rent be excluded from income.
When preparing the tax returns of individuals who receive free or reduced rent for providing security or other services, the issue of income must be addressed and reported as appropriate.


Excessive costs (Lavish and Extravagant)
Tread carefully when deducting “luxury” business expenses Many people are surprised to learn that some “luxury” items can be deductible business expenses. Of course, moderation is key. Excessive spending is sure to attract the IRS’s attention. As some recent high-profile court cases have shown, the government isn’t timid in its crackdown on business owners using company funds for personal travel and entertainment.


First class travel
The IRS doesn’t require that your business travel be the cheapest mode of transportation. If it did, businesspeople would be traveling across the country by bus instead of by plane. However, the expense as it is relative to the business purpose must be reasonable. Taking the Queen Mary II across the Atlantic to a business meeting in the U.K. could raise a red flag at the IRS.

As long as your business is turning a profit and is operated legitimately as a business and not a hobby, traveling first class generally is permissible. Even though a coach airline seat will get you to your business appointment just as quickly and an inexpensive hotel room is a place to sleep, the IRS generally won’t try to reduce your deduction.

However, if your trip lacks a business purpose, the IRS will deny your travel-related deductions. Don’t try to disguise a family vacation as a business trip. Many people are tempted; it’s not worth the consequences, especially in today’s environment where the IRS is aggressively looking for business abuses. To get around consider making your spouse a bona-fide active owner/officer of your corporation or LLC. Ditto for the kids or other family members. By doing this correctly the trip is not a family trip for pleasure, rather it is an owners’ trip for business, and the owners just happen to be related family members. The distinction is an important one.


Conventions
Convention expenses are deductible if a sufficient relationship exists to your profession or business and the convention is in North America. No deduction is allowed for attending conventions or seminars about managing your personal investments.

Overseas conventions definitely get the IRS’s attention. If you want to deduct the costs of attending a foreign convention, you have to show that the convention is directly related to your business and it is as reasonable to hold the convention outside North America as within North America.


Cruise
http://www.bradfordtaxinstitute.com/Free_Resources/DeductCruise.aspx


Country club expenses
Country club dues are not deductible. In fact, no part of your dues for clubs organized for business, pleasure, recreation, or social purposes is deductible.

Some country club costs may be partially deductible if you can show a direct business purpose and you meet some tough written substantiation requirements. These include greens fees as well as food and beverage expenses. They may be deductible up to 50 percent.


Meals and entertainment
Younger taxpayers probably do not remember the “good-old-days” when business meals and entertainment costs were 100% deductible and when business deals were hashed out over “three martini lunches.” But meals haven’t been 100% deductible for some time now and, like other entertainment expenses, the IRS combs through them carefully looking for abuses.

Expenditures for meals, entertainment, amusement, and recreation are not deductible unless (1) they are directly related to, or associated with, the active conduct of your business. The IRS also requires you (2) to keep a written or electronic log, made near the time that you make the expenditure, recording the date, time, place, dollar amount & business purpose of each expense and the attendees & their business relationship.

Even if you pass those two tests, only 50 percent of most meal and entertainment expenses are deductible. If you write-off business meals through your company and there is a proper reimbursement arrangement in place, you won’t be charged with any imputed income for the half that is not deductible, but your company will be limited to a 50 percent write-off.

To substantiate meal and entertainment deductions, one method that can be used is on each credit card receipt, make sure the following are clearly written:

  • Who was present? (their names and their business relationship)
  • What business was discussed? (immediately before, during or immediately after the meal/entertainment)
  • How was this related to your business?  Or what was the purpose?
  • Where was the business discussion held and the meal consumed? (name and location of restaurant)
  • When was the meal/entertainment and business discussed? (exactly on what date)
    • Exact cost of the meal/entertainment?

 

Nice article on: Business Deductions: Automobile, Entertainment, Meals & Travel


Meals for the convenience of the employer
IRC §119 allows for 100% 50% deductible meals when they are for the convenience of the employer and they are furnished on the business premises of the employer. The business premises must pass one of two tests: a “spatial” definition, which focuses on the physical extent of the employer’s property or a “functional” definition, which focuses on the performance of services by the employee.

The meals should not be given as a form of extra compensation or as perquisites (perks). Examples of why meals would be 100% deductible and also fully excludable from the employee’s income:

  • Very short meal period allowed
  • No available eating facilities outside the business premises
  • Employee must remain on site for business reasons (to meet customers or to trade securities elsewhere, for example)
  • Employee must not leave the office to pick-up the meal, rather the meal needs to be delivered so the employee is able to continue work, uninterrupted.
  • To attend mandatory business meetings


The meals must be just that: meals. Cash allowances or reimbursements for meals (and lodging for that matter) generally, must be included in gross income by the employee.

The family may join the employee for the meals. §119(a) specifically states that your spouse and other dependents may partake in the free meals.


Partners and s-corporation shareholders

There are some misunderstandings as to if only c-corporations are allowed this as a deduction or if other entities and self-employed businesses qualify. Also whether “employees” includes owners, partners (§703(a)(2)(E) & §707(a)) , LLC members, managers, shareholders (§1372) and officers can also be subject to debate.

Non-employees are not covered: Weeldreyer v. Commissioner ; Schmidt v. Commissioner ; Tschetter v. Commissioner ; Waterfall Farms, Inc. v. Commissioner ; Armstrong v. Phinney, 5th Cir., 1968. ; JofA article ; Iowa State Univ. article ; Univ. of Miami article ; College of Wm & Mary article

Nice blog: Mileage Deduction 101