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When it comes to traveling and entertainment expenses for business, they must be well documented so that no red flags are raised on your tax return. It would certainly be nice to take a trip to Hawaii and write it all off on our taxes, but that's only possible if the trip complies with the IRS' laws regarding business travel and expenses.
Basically, for travel and entertainment expenses to be considered as deductions, they must be ordinary and necessary for your business. 'Ordinary' means that they are part of what is considered normal for your type of business. If you're a doctor, talking business with a client in a nightclub may be a bit of a stretch. Deducting the cost of a meal in a fancy restaurant, however, may not. Business can ordinarily be discussed in that setting and, of course, both of you have to eat.
'Necessary' means that it is something that is helpful for your business. Traveling to California to meet with a client who lives out there is necessary. Taking your family with you (and then trying to deduct the expense) is not. Any travel or entertainment expense that's used for business and personal reasons must to be divided proportionately and accurately for the purpose of business deductions.
There's a wide degree of latitude for travel and business expenses, but the rule of thumb is to document everything. An overnight business trip is deductible if it's necessary for your business. If you arrive and your client has an urgent meeting and must push yours back to the following day, it is a necessary reason to stay another night. The cost of the room, taxi or airport shuttle, plane fare and associated costs are all deductible business expenses.
Any form of travel for business that is ordinary and necessary can be claimed as a business deduction. The travel doesn't have to be yours to qualify. Flying a potential employee to see your company or a client to your offices is an example of a travel deduction. All expenses in relation to his visit are deductible.
Entertainment expenses have to be necessary and ordinary. Showing a client a night on the town while he or she is in your city may qualify as an entertainment expense that can be deducted on your taxes. Entertainment is a bit harder to justify unless you're actually in the entertainment business, in which case taking clients to nightclubs and shows would be a part of your normal business practice.
Meals that don't qualify for reimbursement during a trip are subject to a fifty percent deduction. Meals with a client during which business is discussed can be deducted as a travel expense when visiting the client. Remember to deduct each event only once. For example, if you deduct your meals on an overnight trip as travel expenses, don't try to use the same meals to claim a deduction for non-reimbursable business expenses.
Keeping an organizer that lists the dates of your trip along with an envelope for all receipts; this will ensure that no deductible expenses are missed. Consult a tax professional if you have any questions regarding the validity of an expense. If you can prove that business was conducted, the expense should stand.
