Travel and Entertainment: Maximizing the Tax Benefits

Travel expenses you can deduct

For 2018 through 2025, employees who incur travel, meal, or auto costs for business generally can't deduct them on Schedule A, a result of the Tax Cuts and Jobs Act suspending miscellaneous itemized deductions. Businesses and the self employed are the ones who can generally still deduct these costs.

Two broad categories of travel expense are deductible. Local transportation costs cover trips from your workplace to other locations, visiting a client or vendor, for example, whether by public transit, taxi, rideshare, or your own car, including parking and tolls. Ordinary commuting isn't deductible, but if your main place of business is your home office, trips from that home office count as deductible business transportation rather than commuting.

Away from home travel expenses are the second category. Lodging is fully deductible while you're away, meals are limited to 50 percent, and transportation costs are 100 percent deductible as long as business is the primary reason for the trip. To count, travel expenses need to be ordinary and necessary, though "necessary" is interpreted loosely, closer to helpful and appropriate than strictly required. Lavish or extravagant costs aren't deductible, though that rule doesn't automatically bar first class travel or nicer accommodations.

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What "away from home" actually means

To deduct lodging, meals, and incidentals, you generally need to be staying somewhere overnight, away from your regular place of business longer than an ordinary day's work, to the point you need rest or sleep to meet the demands of your work. Otherwise, your costs are just local transportation, and lodging and meal costs aren't deductible.

Your tax "home" is your place of business or post of duty, not necessarily where your family lives. If your business is in one city and your family lives in another, your tax home is where the business is, and the costs of commuting between the two, along with your regular meals and lodging at your place of business, are not deductible.

Temporary versus indefinite work assignments matter here too. If you're working at a temporary site expected to end within a foreseeable time, travel, meal, and lodging costs tied to that assignment are generally deductible. If the assignment is expected to last more than a year, it's considered indefinite, and those costs stop being deductible.

Deductible away from home expenses generally include meals (limited to 50 percent) and lodging, clothes cleaning while away, transportation between job sites or to and from hotels and terminals, airfare and related fares, sample and display shipping costs, car and airplane operating costs, and reasonable tips tied to any of these. Costs that generally aren't deductible include travel that's primarily educational, costs of searching for a new business location, amounts above the per day limit on luxury water travel, and the cost of traveling abroad to find foreign markets for existing products.

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Meal and entertainment expenses

Entertainment expenses paid after 2017 generally aren't deductible at all, with narrow exceptions such as social activities held primarily for employees. Dues paid to country clubs, social clubs, golf and athletic clubs, and most professional and civic organizations are also nondeductible now, a change from the pre 2018 rule that allowed 50 percent deductibility when membership had a genuine business purpose.

Meals with clients are still 50 percent deductible, as long as they're ordinary and necessary, not lavish or extravagant, and directly related to or associated with your business. To show a meal is directly related, you generally need more than a general hope of goodwill: you need a real expectation of business benefit, an actual business discussion during the meal, and business as the main purpose of the meeting. If you can't clear that bar, the "associated with" test offers an alternative: the meal has to directly precede or follow a substantial business discussion, with a clear business purpose behind the expense. Either way, the person you're dining with needs to be a genuine business associate, someone who could reasonably be a customer, employee, or professional contact.

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Recordkeeping and substantiation

Tax law requires records that prove both the business purpose and the amount of your travel and meal expenses. For each deduction, you generally need to show the amount, the time and place, the business purpose, and the business relationship of anyone you dined with. The most common reason the IRS disallows these deductions is a failure to document place and business purpose, so that's worth extra attention.

A diary or logbook kept close to the time the expense happens is one of the most reliable ways to document this. For away from home travel, document the amount of each expense (similar incidentals can be grouped, like "meals, taxis"), your departure and return dates, your destination, and the business reason for the trip. For business meals, document the amount, the date, and the name, title, and occupation of your guests.

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If your employer reimburses you

Employees fully reimbursed by their employer need to account for the expense through an expense report and return any excess reimbursement. As long as you're covered by an accountable plan and your reimbursements don't exceed your actual expenses, you don't have to report the reimbursement as income. Some per diem and mileage allowance arrangements skip detailed accounting to the employer, though you still need proof of time, place, and business purpose. If your employer's plan isn't accountable, the reimbursement counts as taxable income to you.

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Auto expenses

You generally have two ways to claim business auto expenses: deducting actual costs, gas, oil, repairs, tires, parking, tolls, and depreciation, or using the standard mileage rate, an inflation adjusted amount multiplied by your business miles. Parking and tolls are deductible under either method. Since one method produces a better result depending on your specific situation, it's worth calculating both, especially in the first year you use a car for business.

If a car is used more than 50 percent for business, it can qualify for Section 179 expensing in the year of purchase, with the deduction reduced proportionately for personal use; choosing this route means you can't use standard mileage for that vehicle going forward. Depreciation, where available, is also reduced by the share of personal use, and accelerated depreciation isn't allowed once business use drops to 50 percent or below, which can trigger recapture of previously claimed excess depreciation. Once you choose the standard mileage rate for a vehicle, you're limited to straight line depreciation if you later switch to actual expenses.

The standard mileage method tends to favor owners with less expensive cars or high business mileage, while actual expenses often favor those with pricier vehicles or heavier fixed costs. Good records, mileage logs, receipts, and a clear business versus personal use breakdown, are what let you actually compare the two methods and defend the deduction you choose.

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