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PILLA TALKS TAXES - Featured Article
_________________________________________ 

TRAVEL, MEAL AND ENTERTAINMENT EXPENSES

How to Maximize Travel Expenses

Business travel has been a fact of life since dawn of civilization. Just as an example, for centuries, caravans brought silk, spices and trade goods from Asia across the Silk Road to the Middle East, where they eventually found their way to Italy. In turn, Italian mariners based chiefly in Genoa brought those goods to the world. While the business travel of the typical small business owner is not quite as exotic as traveling the Silk Road, it is just as necessary to the life of that business. 

Though your business travel might not be exotic, the IRS’s requirement to make and keep records is. That’s why so many business owners lose the benefit of their travel expenses when they are audited. But if you understand the rules, you’ll ensure that your legitimate business expenses are allowed as deductions. And by carefully planning your trips, you can get a legitimate business deduction for just about all your travel expenses. The key is to know in advance how to prove your case. 

The Rule for Deducting Business Travel 

Let’s carefully examine the rules for deducting business travel. 

There must be a business purpose for the trip. Code section 162(a)(2) allows a deduction for “traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business.” The first rule is that your expenses must be related to the conduct of your business. You have to prove a direct link between the travel in question and the successful operation of your business. 

How do you accomplish this? Code section 274(a)(1)(A) provides guidance. This statute provides for a deduction when the trip was directly related to the “active conduct” of your trade or business. Travel to meet with existing or prospective customers, clients or patients is directly related to the active conduct of your business when your personal contact with these people is necessary to the success of your business. An example is traveling to a city to meet with a customer or supplier in his office expressly for the purpose of conducting existing business or attempting to establish new business that will have a positive economic impact on your operations. 

Section 274(d) adds an important substantiation requirement that must be observed. To meet the “active conduct” burden of proof, you have to establish through adequate records or by other evidence corroborating your own statement, the following items: 

·  The amount of each expense,

·  The time and place of the travel,

·   The business purpose of the expense, and

·   The business relationship to you of persons you met with during your travel. 

A log of your business travel should include all of these items. In describing the business relationship of the persons you met with, a simple statement showing the nature of your relationship and the purpose of your meeting is sufficient. For example, if you met with Mr. Jones of the ABC Company, who is a re-seller of the products you manufacture (or sell), a statement indicating that he is a prospective (or current) buyer of your products, meets this requirement. See chapter (TBA when book is out) for recordkeeping details and a sample log is included in the appendix to this manual. 

Your expenses cannot be lavish or extravagant. Whether a given expense is excessive is determined on a case-by-case basis. The IRS must look to the nature of your business, the type of clientele you deal with and the expectations of the market you’re in to determine this issue. What is lavish for one person may not be for another. 

For example, a high-end jewelry wholesaler may arrange meetings with retailers at posh hotels, may serve elaborate lunches or dinners to his prospects, and may incur high costs for security at his functions. Given the high cost of his products, this would not be considered lavish or extravagant. On the other hand, a clothing salesman who meets with prospective customers in their own stores could not likely justify the cost of a posh hotel setting. 

The expenses must be “reasonable and necessary” to the conduct of your business and the expenses must be “directly attributable” to your business. Treas. Reg. §1.162-2(a). 

Here you must show a direct link between the expense incurred and the conduct of your business. This includes travel expenses to and from the city in question, overnight lodging expenses, meals, entertainment expenses (discussed below) directly related to your business, and other costs incurred in carrying out your activities on the road. 

Treasury Regulation section 1.274-2(c)(3) lists four requirements that you must to show to make this connection. An expense is directly related to, or associated with, the active conduct of your business if: 

·        You had more than a general expectation of deriving income or some other specific trade or business benefit. Your expectations of business activity from the travel must be specific and tangible, not merely related to “good will” or other “blue sky” expectations. 

·        You actively engaged in a business meeting, negotiation, discussion, or other bona fide business transaction, other than entertainment, for the purpose of obtaining income or some other specific business benefit. Merely hobnobbing with potential customers is not sufficient to meet this rule. You must have met with existing or prospective business associates in a business environment. This does not mean that you must have actually made a deal with prospective customers. 

·        In light of all the facts and circumstances of the case, the principle character of the meeting was the active conduct of your trade or business. It is not necessary that more time be devoted to business than to entertainment to meet this requirement. It is only necessary to prove that the overarching theme of the meeting was to carry out business. For example, suppose you travel to Los Angeles to meet with three customers who portend substantial sales for your business. You meet in a local hotel conference room for two hours, discuss your business affairs, then take the customers to a baseball game and dinner, where you spend a combined five hours. The fact that the meeting only lasted two hours does not change the character of the business meeting. The costs are deductible. 

·        The expenditures were for you and persons with whom you engaged in the active conduct of your trade or business. Expenditures attributable to a person not related to your business are not deductible. 

Business and personal travel may be mixed. Treasury Regulation section 1.162-2(b)(1) makes it clear that where personal and business travel are mixed, travel expenses may nevertheless be deducted “if the trip is related primarily” to your trade or business. Suppose you travel to New York City for the primary purpose of meeting with prospective clients. While there, you meet with college friends, go to dinner and a Broadway show. 

The fact that you engaged in personal activities while in New York does not change the character of the travel as being primarily for business. However, because the meeting with friends was purely personal in nature, you get no deduction for expenses attributable to that dinner and the show. Still, your travel expenses, hotel, cab fares, etc., are fully deductible since the primary purpose of the trip was business in nature. 

Even if your trip is not primarily business-related, expenses that “are properly allocable” to your trade or business are still deducted. Suppose you’re on the same trip to New York. But instead of a business purpose, you take the family there for a family reunion. While in New York, you set aside one day to meet with prospective clients. All costs incurred in connection with that activity, such as cab fares, meals or entertainment with the clients, are deductible. This is true even though your travel expenses to and from New York and your hotel costs are not.   

 

 

This is a portion of an article taken from September 2017  issue of "Pilla Talks Taxes."  
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ARTICLES FOUND IN THE LATEST 

PILLA TALKS TAXES ISSUE:

 

TRAVEL, MEAL AND ENTERTAINMENT EXPENSES
      How to Maximize Travel Expenses

FILING A TIMELY CDP LIEN APPEAL
      Pay Attention to the Filing Address on Letter 3172

ID THEFT MARCHES ON
      Another Reason the IRS Can’t Stop the Crimes 

EQUIFAX DATA BREACH AFFECTS MILLIONS OF AMERICANS
      Here’s What You Can Do Now

 

 

 

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