The new Tax Cuts and Jobs Act (TCJA) gave us some new rules to live by in many areas of the tax code but one in particular relates to entertainment expenses which are no longer deductible. But what about similar expenses for meals & travel? Are you aware that meal & travel expenses are deductible? Are you screening your business expenses like a TSA worker to find every deduction? Are you aware of what you have to do to deduct them? Did you know that with today’s technology it’s easier than ever to stay in compliance with IRS documentation rules? Let’s take a tour through the new rules and find a destination for your meal & travel expenses on your tax return.
The new norm is a world without deductible entertainment expenses. So before you run out and buy those box seats to impress the potential client you better make sure you can live without the deduction first. Say adios to the tax-free good times.
But impressing those potential clients over a meal might still save your bacon. TSCJ gave a nod to business meals so let’s start with the appetizer before working our way to the dessert. Meals continue to be deductible as long as it’s not lavish and you are present at the meal. Lavish is subjective and to some extent presence is too. If you’re worried about a lavish meal then it probably is, right? Otherwise, check with a nerd like me to get some parameters on how much is too much. But what about being present? Can you Facetime someone and still buy the meal? I’m waiting to see where the new environment of commerce takes us in this debate, but for now you can play it safe with a classic face-to-face business meal and still get the deduction. Now to the main course of tax savings. Meals get shredded by a 50% dis-allowance meaning the IRS will only let you deduct 50% of the cost on your tax return. Still better than nothing, but the steak just got a little leaner. Meals under $75 will leave a little more room in your filing system for dessert because there are looser documentation standards for all travel-related expenses under $75. We’ll get to what you need to keep for proof later but just remember $75 or less is filing system friendly.
Now that we’re done dining it’s time to leave on that jet plane or rental car and get checked in to the hotel. As long as these costs aren’t lavish you can rest easy that your travel costs are deductible. But what if you take your spouse along to enjoy after business hours? There’s no room in the inn to deducts expenses related to the non-business travelers. You’ll have to get to do some nitty gritty cost allocations to make sure you’re not upgrading your business deduction to a better deal than it should be. Do you use your personal automobile for business purposes? If you do then you’re like the majority of us small business owners and you should be getting the deduction you deserve. You can either deduct the actual operating costs or use a standard mileage rate predetermined by the IRS. Either way you’ll need to keep a mileage log. But before you roll your eyes and throw your keys keep reading for a great solution for keeping track of your miles.
So what do you really need to keep for proof that you really did eat a meal or stay at a hotel? I tell my clients to pretend like you’re talking to a teenager that just got back from South Padre. In other words, the IRS will want to know who you were with, how long you were there, where it was at, how much it cost and what in the world did you buy? That sounds burdensome but let’s take a look at what we already get with most receipts. Take a restaurant meal tab (not the credit card slip you enter a tip and total on) for instance. It already shows the location, date/time and cost of the meal. All you need to do is write on the back who you were with and a summary of what you discussed. Keep in mind that the meal tab does not show the tip amount so make sure you keep the credit card slip too so you can prove the entire cost of the meal including tip. What about a hotel folio or car rental receipt? Pretty simple there too. They both include the location, date/time and cost. All you need to do is write on the folio or receipt who you met with and the business you conducted. Recall the sweet tidbit from earlier in this article about a $75 limit? If you can produce the same information in a substitute format like a credit card statement plus a journal or narrative of the occasion then you can get by without a receipt. In my experience I’ve had to even educate auditors about this little nugget, so don’t be surprised if it sounds crazy to someone. As a business owner you may want hold yourself to more strict standards and keep the receipts anyway just to be a better business manager. Keep in mind that there’s a little slice of administrative grace available to you should you find yourself without a receipt. You may also want to consider per Diem rates which are predetermined by the IRS as opposed to deducting the actual travel costs. You’ll still have the same documentation burdens but the per Diem rates might make for a simpler, cleaner calculation. Of course if your working with a nerd like me, I would love to analyze a break-even and help you find the best system possible!
!Tip! – thermal paper is a common media to print receipts for meals, gasoline and a whole bunch of other purchases. But just because you get a receipt doesn’t help you if three years from now an auditor is looking at it and the ink has disappeared from the thermal paper. Make sure you take a picture of the receipt with your phone or make a copy to ensure your proof is properly preserved if you need it. It would be unfortunate if you went through all the work to keep the receipt in that banker’s box for three years only for it to be useless at the point when it is most needed! Or better yet, create a file in your Google Drive called “Receipts” and just store images of your receipts there!
There are great option out there to help you easily integrate documentation with your accounting software. Checkout what they’re doing at Receipt Bank, MileIQ and Bill.com to wet your pallet on some great user-friendly solutions. Another solution is to create a Google Sheet and keep track of your miles from your device or tablet.
Bonus thought: what about the extra fee I pay for data? It’s funny how far we’ve come in this area. Computers used to be scorned by the IRS as “listed property” because of the inherent potential of mixed business/personal use. But in today’s tech environment the argument of necessity is clear: we need our devices to do business. As I type this article I’m sitting in an airport…working on vacation! If you’re a small business owner then you should be deducting your device and the operating costs associated with it (data plans, insurance, etc.). The key is to be reasonable about how you do it because the IRS isn’t going to accept 100% business use for personal devices. But 90% business use isn’t out of the question. As long as you’re making a reasonable provision for personal use then you’ve got a solid argument and you’ll enjoy the tax savings as you swipe.
Thanks for taking this journey through the menu of tax deductions available to you thanks to TCJA. Hopefully you’ll find a beautiful destination on your tax return for some of those business expenses that deserve a break!