Travel and Entertainment: Frequently Asked Questions

Table of Contents

• Can I deduct the cost of meals on days I call on customers or clients away from my office?
• Must I report employer reimbursements for travel, entertainment and meals?
• What are the limits on deductible travel, entertainment and meals cost?
• Can I deduct living expenses on temporary assignment away from the area where I live and work?
• What expenses can I deduct while traveling away from home?
• What can't be deducted as travel expenses?
• What can I deduct for business entertainment?
• How do I prove my travel and entertainment expenses?

Can I deduct the cost of meals on days I call on customers or clients away from my office?

Generally not. Usually, you can only deduct costs of meals when you're away from home overnight, or as part of business-related entertainment.

Even when deduction is allowed, it's only to the extent of 50% of the meals costs and related tips.

Must I report employer reimbursements for travel, entertainment and meals?

It depends. If you give your employer a detailed expense accounting, return any excess reimbursement, and meet other requirements, you don't have to report the reimbursement-and don't deduct the expenses.

This means that any deduction limits are imposed on your boss, not you, and the 2% limit on miscellaneous itemized deductions won't affect your travel, entertainment and meals costs.

What are the limits on deductible travel, entertainment and meals costs?

There are no dollar limits. Expenses must be "ordinary and necessary" (meaning appropriate and helpful) and not "lavish or extravagant", but this doesn't bar deluxe accommodations, travel or meals.

Deduction for business entertainment and business meals can't exceed 50% of the cost.

There are additional special limitations on skyboxes and luxury water travel.

Can I deduct living expenses on temporary assignment away from the area where I live and work?

Yes. Living expenses at the temporary work site are away from home travel expenses.

An assignment is temporary if it's expected to last no more than a year. If it's expected to last more than a year, the new area is your tax home, so you can't deduct expenses there as away from home travel.

What expenses can I deduct while traveling away from home?

A wide range of expenses can be deducted while traveling away from home.

Here are the main ones:

• Transportation fares, or actual costs (or a standard per mile rate) of using your own vehicle. Also, transportation costs of getting around in the work area-to and from hotels, restaurants, offices, terminals, etc.

• Lodging and meals (subject to the 50% limit on meals)

• Phone, fax, laundry, baggage handling

• Tips related to the above

What can't be deducted as travel expenses?

The following travel expenses cannot be deducted:

• Costs of commuting between your residence and a work site, but it's a deductible business trip if your residence is your business headquarters.

• Travel as education

• Job hunting in a new field or looking for a new business site

What can I deduct for business entertainment?

There are various conditions and limits for deductions for business and entertainment.

• Generally, there should be a business discussion before, during, and after the entertainment.

• Generally, deduction for entertainment and meals is limited to 50% of the cost.

• There are further limitations for club dues, entertainment facilities and skyboxes.

• Spouses of business associates, and your own spouse, can be included in the entertainment in settings where spouse attendance is customary.

How do I prove my travel and entertainment expenses?

If you're an employee who is reimbursed for expenses you'll need to file and expense report for your employer, which is a written accounting of your expense while on travel. If you received a cash advance, you'll also need to return to the employer any amounts in excess of your expenses.

Some per diem arrangements and mileage allowances-called "accountable plans"-take the place of detailed accounting to the employer, if time, place and business purpose are established.

Where expenses aren't fully reimbursed by your employer, or excess reimbursements aren't returned, detailed substantiation to IRS is required and, if you're an employee, your deductions are subject to the 2% floor on miscellaneous itemized deductions.

In addition, your expense records should be "contemporaneous", that is, recorded close to the time expenses are incurred.