Business travel is back as pandemic-related restrictions continue to fall away and people finally return to conferences, trade shows and face-to-face meetings. But while you are focusing on making your connections, make sure you don’t miss your deductions.
According to the IRS, deductible travel expenses are fairly straightforward. They include travel by airplane, train, bus or car between your home and your business destination, fares for taxis or other types of transportation between an airport or train station and a hotel, or from a hotel to a work location.
You can also deduct such things as the cost for shipping of baggage, samples or displays, dry cleaning and laundry, and business calls.
Beware Mixing Business and Pleasure
But before you head out to dinner and a show, it is important to drill down into the details of those rules. Mixing business and pleasure can get you into hot water, says John E. Rich Jr., director and chair of the Tax Department at McLane Middleton law firm in Manchester.
“Approach a mixed trip with caution. If someone goes to Florida for a conference, there are rules about what is presumptively a business expense but don’t assume the entire trip is deductible,” says Rich. “When the spouse goes along, there is no business purpose unless both are employed by the company. We hear the argument that he or she is integral to the business, but that is not correct. It is best to have a company policy and have someone to review the expenses to see that policy is being followed.”
Meals and Entertainment
Meals at restaurants—at the moment—are deductible. But this IRS rule has changed significantly over the past few years, says Matthew J. Nadeau, CPA and principal at Nathan Wechsler & Company in Concord.
“Business meals at restaurants are 100% deductible, where previously it was part of a phase out,” says Nadeau. “Historically it was always 50% deductible and then they were talking about bringing it to zero, then COVID hit. They it made it 100% deductible for 2021 and 2022, but that’s not currently set to go beyond 2022.”
He says the key to the meal deduction is restaurants. Meals at an employer sponsored cafeteria or purchasing prepared foods at grocery stores are excluded.
Whatever the expense, there has to be a legitimate business purpose in order for it to be deductible. “The big hot button issue is Patriots tickets and the Bruins. That’s entertainment, it’s not deductible,” says Nadeau. “People will try to get away with saying those are business expenses.”
Comply or Pay
It is important to make sure all deductions comply with laws, rules and regulations. “This is something everybody struggles with because the IRS rules are pretty strict,” says Rich. “CPAs will tell you everybody is busy, and people don’t necessarily take the time to comply with the exact letter of the law. Even really good employers with an eye for compliance sometimes struggle; then it becomes a lightning bolt when the IRS comes calling.”
The biggest issue for many is the documentation as a hotel receipt or credit card statement would not necessarily meet all the IRS requirements. And if a business is audited, the burden is on the business to produce the necessary receipts, substantiation, or logbooks for deductions they have taken. The law is clear on this, says Rich.
Just as importantly, an owner shouldn’t assume that the CPA firm is signing off on expenses when doing a review of the tax return as that is not typically what they were hired to do. “They are taking the expenses at face value unless specifically asked to review them. That is why it is important for a business to have a policy and if an employee submits expenses, there needs to be someone in the position of verifying those submissions,” says Rich.
IRS Swamped
While the prospect of an audit may be scary, it’s possible the IRS is too busy catching up from years of too much paperwork and too few employees to handle the workload.
“We’re seeing clients get all manner of notices because of IRS errors and backlogs. We have clients who haven’t even gotten 2020 refunds, and we filed them electronically,” says Nadeau. “They are so far behind, seem very disorganized and you can’t get through on the phones. It has been really frustrating as a tax preparer to try to help clients with IRS problems. They don’t even have email; you have to fax documents to them.”
Even with a boost of funding, the IRS may struggle to find the workforce they seek. “We have always struggled to find bookkeepers, and there’s a CPA shortage too. A lot of New Hampshire CPAs are retiring, and it is only getting harder and harder,” say Nadeau.
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