Tax reform through the federal Tax Cuts and Jobs Act created a ton of new tax rules for business owners. So many in fact the IRS in January just released some final regulations on key parts of the act, more than a year after it was enacted.
While there are a lot of tax changes to learn, there is some good news for business owners: Some business tax provisions remained the same or largely so, including business travel deductions.
Lodging and travel by airplane, train, bus or car remain 100% deductible. As do rental cars, taxi fares, tolls and tips.
Meals eaten while traveling for business remain 50% deductible. You have the option of deducting half of the actual costs, or if keeping receipts of all your meals sounds too time consuming, you can generally use the federal standard meal allowance. Rates vary depending on your area of travel – they can be found at gsa.gov/travel/plan-book/per-diem-rates
If client entertainment is part of your business trip – that’s where the rules have changed. Starting in 2018, entertainment expenses are no longer deductible (they used to be 50% deductible.) This includes items such as golf outings, concerts or sports tickets. Such outings used to be standard client or prospect relations for many business executives. While federal tax reform is seen as largely positive for business, this deduction is greatly missed by some.
One upside is any meals associated with entertainment activities are still 50% deductible. For example, if a business owner takes a group of clients golfing, the cost of the greens fees would not be deductible, but food and beverages purchased before, during or after the round of golf, will still be 50 percent deductible. Or business meals on their own also remain 50% deductible.
Many businesses had recorded their entertainment and meal expenses on the same general ledger account because the tax treatment was the same. With the tax reform changes, it is now best practice to set up separate general ledger accounts, one for meal expenses and one for entertainment expenses.
Most other business travel deduction rules remain the same post tax reform, but it’s good for business owners to keep on top of them so they remain in compliance. Here are some tips to keep in mind:
- If you’re planning to add some personal travel on to a business trip, be sure to track the expenses separately. Your flight can generally be deducted, but your hotel costs should be split between business and personal days if you have exclusive or mostly personal days. Things like sightseeing excursions or other personal expenses can’t be deducted. If a trip is primarily personal, none of your traveling expenses are deductible, even if you take part in some business activities.
- Much like your personal expenses, any expenses for your spouse or other family members who travel with you should be tracked separately, unless by chance your spouse also works for your company. Then those expenses also can be deducted.
- Lavish or extravagant expenses don’t qualify for deductions. That means dinners at five star restaurants, renting flashy sports cars or staying in the penthouse suite are out of the question – at least when it comes to tax deductions.
- There are also special rules if you’re a person who regularly works away from home. The IRS has a term called “tax home” – this is city where you conduct most of your work and it can be separate from where you reside. For instance, say you live in the Allentown area but your office is located in Wilmington, Delaware, where you stay during the week. In this case, you can’t deduct your expenses in Wilmington because that’s your tax home and you can’t deduct travel back and forth to Allentown because it’s considered commuting.
- Business-related foreign travel also is tax deductible but good documentation is a must as the IRS closely inspects these expenses because of the potential for abuse (such as making your bucket list trip to Italy under the guise of a business trip.) Again, it’s a best practice to segregate your business and personal expenses.
- In the case of a startup business, you can’t deduct business travel expenses like established businesses can but you can include them in your startup deductions. Business travel for reasons such as locating suppliers or distributors can be included in your permitted $5,000 allowance of business startup cost deductions.
Federal tax reform maintained many business travel deductions but it’s important to learn and follow the latest rules. Like many areas of tax law, good recordkeeping is essential and will help you avoid unforeseen tax consequences. Contact us with any questions you have on business travel and what qualifies for deduction.