Travel, Lodging, Meals and Entertainment (T&E) Expenses - Tax Deductibility and Compliance

• ​Safely incur business travel expenses,
• ​Stay compliant with U.S. tax law, 
• Avoid penalties, optimize your taxes, and also 
• Manage your employees and expenses.
  

• Risks and costs of non-compliance
• ​​For shareholders and owners
• For employees and contractors

• Deductible Expense Types
• Meal expenses
• ​Entertainment expenses
• ​Travel and lodging expenses
• Documentation and Information Requirements

Intro

Compliance with IRS requirements on business travel and entertainment (T&E) expenses is highly crucial to avoid severe penalties. Though business travel and entertainment (T&E) is very common and necessary for many business owners and their teams, the absence of a formal policy, not understanding what is covered and what is not, not having supporting documents and information are key risks that can result in severe taxes and penalties, as well as out of control expenses.​

​If you don’t have an in-house HR or finance team with the required experience and skills, you may want to work with a professional service firm on this subject.​

​We have summarized and even detailed the key issues in this article to manage your business travel, lodging, meal and entertainment expenses.

​Travel & Expense (T&E) Policy

Having a formal, written T&E policy is essential for any business, so please do not treat it as a nice to have practice especially if you are having travel, hotel, meal and event expenses frequently or in material values. A T&E policy covers the expenses made by employees and contractors for their business related travels, lodging, meals and entertainment.​

​ ​Why do you need a T&E Policy:​

Meal Expenses

You can generally deduct only 50% of any otherwise deductible business-related meal expenses you reimburse your employees as of Jan 1st 2022. The deduction limit applies even if you reimburse them for 100% of the expenses, meaning you may still pay your employee the full meal amount but can only deduct 50% of it for tax purposes.

The general practice is that you will be paying your team the full 100% meal expense but take the tax benefit on 50% of the amount.

The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while 

• Traveling away from home on business
• Meals for business customers at your place of business, a restaurant, or another location. 
• Expenses incurred at a business convention, reception, business meeting, or business luncheon at a club
• Meals you furnish on your premises to your employees 

Make sure that your policy is not lavish or extravagant - you can set limits in your T&E policy to ensure this! You can't deduct expenses for meals that are lavish or extravagant. An expense isn't considered lavish or extravagant if it is reasonable based on the facts and circumstances. Meal expenses won't be disallowed merely because they are more than a fixed dollar amount or because the meals take place at deluxe restaurants, hotels, or resorts.

Entertainment Expenses

In general, entertainment expenses like concert tickets or golf games are not deductible.

However, a company wide party can be deducted when it is substantiated by related invoices, the attendee list and the business purpose (like a yearend party for the whole team event at a luxurious hotel).

To give you a perspective… If you have a yearend event just for the shareholders, without a business reason like raising money or more funds from them, then this spending may be treated as dividends / benefits and thus either non-deductible or more probably as dividends subject to additional tax.

Travel and Lodging Expenses

You can deduct all your travel expenses of getting to and from your business destination if your trip is entirely for business or considered entirely for business. 

• Travel by airplane, train, bus, or car from your home or office to your business event, hotel, airport, etc. destination.
  • Watch-out! Travel, commuting between your home and office is not a travel expense and can not be expensed.
• Taxi, commuter bus, and airport limousine fares for these and other types of transportation that take you between:
• The airport or station and your hotel; and
• The hotel and the work location of your customers or clients, your business meeting place, or your temporary work location.
• Baggage and shipping; sending baggage and sample or display material between your regular and temporary work locations.
• Operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.

• Travel expenses for another individual. If a spouse, dependent, or other individual goes with you (or your employee) on a business trip or to a business convention, you generally can’t deduct their travel expenses.
• Employee. You can deduct the travel expenses of someone who goes with you if that person: 
• Is your employee, 
• Has a bona fide business purpose for the travel,
• Would otherwise be allowed to deduct the travel expenses. 
• Business associate. If a business associate travels with you and meets the conditions above, you can deduct the travel expenses you have for that person. A business associate is someone with whom you could reasonably expect to actively conduct business. A business associate can be a current or prospective (likely to become) customer, client, supplier, employee, agent, partner, or professional advisor. 
• Bona fide business purpose. A bona fide business purpose exists if you can prove a real business purpose for the individual's presence. Incidental services, such as typing notes or assisting in entertaining customers, aren’t enough to make the expenses deductible. 

For example: You drive to Chicago on business and take your spouse with you. Your spouse isn’t your employee. Your spouse occasionally types notes, performs similar services, and accompanies you to luncheons and dinners. The performance of these services doesn’t establish that your spouse’s presence on the trip is necessary to the conduct of your business. Your spouse’s expenses aren’t deductible. You pay $199 a day for a double room. A single room costs $149 a day. You can deduct the total cost of driving your car to and from Chicago, but only $149 a day for your hotel room. If both you and your spouse use public transportation, you can only deduct your fare.

Documentation and Information Requirements:

Even if you comply with all the requirements above, you need to substantiate these to IRS and it brings the requirement of documentation.

Plus, as the year passes by, you and your team forget about business trips or meals from 3-5 years ago.

A  “spreadsheet of expenses”  or ''supporting credit card and bank statements” are not enough by themselves to provide the requisite information regarding the business purpose of the expenses.

To safeguard your deductions and mitigate the risk of facing a tax audit, we advise you to take the following steps:

• Obtain and retain receipts, bills that clearly display the date, place and amount of the expense. Credit card slips alone are not sufficient enough as they tend not to itemize the expenses.
• Maintain a contemporaneous written record of all individuals present at the event, outlining their business affiliation and relationship to your business.
• Clearly articulate the specific business purpose of the event, providing a detailed account of any business discussions or activities that transpired. 
• The business relationship between the taxpayer and the person entertained.

We provide comprehensive advisory and consulting services to our clients, not just on T&E or other policies, but we act as their one-stop-shop for all their bookkeeping, accounting, tax, HR & Payroll and other requirements. Please schedule a free discovery call with us to discuss our services and fees.

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