The Tax Cuts and Jobs Act of 2017 (TCJA) included sweeping changes to the Internal Revenue Service (IRS) code for travel expenses, which include transportation, meal, and entertainment expenses for business purposes. There was confusion among tax preparers and business owners after the initial law was passed. Several updates have been forthcoming. The most recent update is Publication 463 and no further legislation has been passed since this publication.
Both small business owners and employees of a business who have to travel for work-related activities can use Publication 463 as guidance when preparing taxes.
Travel expenses are defined by the IRS as ordinary and necessary expenses incurred when you have to be away from your tax home for purposes of your business, profession, or job. Your tax home is the place where you do the majority of your business which is generally the city or town where your business is located. The expenses that are addressed are transportation, meal, and entertainment expenses as long as they are ordinary and necessary. Ordinary expenses are those incurred in the ordinary course of business. Necessary expenses are those that are helpful and appropriate for your business.
If you are traveling away from your tax home on business by car, you can deduct the cost of transportation between your home and your business destination. If you drive your car, you can either use the IRS standard mileage rate or the actual cost of your car expenses, depending on which gives you the most benefit. If you use the standard mileage rates established by the IRS, it is 57.5 cents per mile for car travel for 2020.
If you choose to use the standard mileage rate, you cannot deduct any actual car expenses such as depreciation, lease payments, and gasoline. You can find an exhaustive list of what you cannot deduct if you use the standard mileage rate in Publication 463 under Standard Mileage Rate.
You can also deduct the following: taxi fare, commuter bus, or airport limo; baggage and shipping; dry cleaning and laundry, and tips. Publication 463 has a list of all miscellaneous transportation expenses that are deductible.
If you sell the car you use for business, you may be able to take a capital gain or a capital loss. You can deduct personal property taxes on your vehicle. If you buy a car using the proceeds of a home equity loan, you may be able to deduct part of the interest on that loan.
You may find that it is more beneficial to you to claim your actual car expenses like gas, oil, maintenance, lease payments, and more. Publication 463 lists deductible expenses. If you do choose to claim your actual vehicle expenses and you use your vehicle for personal use, as well as business use, you must divide the expenses between the two.
Since the purchase of a car is a capital expense, you can't deduct, directly, the cost of the car. You can, instead, take a Section 179 deduction. This deduction depreciates the car over a three-year period and you can deduct that depreciation on Schedule C, Profit or Loss from a business if you are a business owner. There are specific rules you follow to claim a Section 179 depreciation deduction.
If you travel by air on business, you can deduct the entire cost of your airline ticket unless it has been paid for by your company.
Meal and Lodging Expenses
You can deduct your cost of lodging under a certain set of rules and if your business trip contains at least one overnight stay. The business trip must involve leaving the tax home for business, to engage in trade, or serve as an employee. The lodging must not be extravagant and should not provide any type of entertainment. Your stay cannot exceed five days. The lodging deduction can only be applied once per quarter.
There is no clear guidance yet from the IRS on the deductibility of meals for business travel. A tax professional should assist in the determination of the deductibility of meals. Meals fall into three categories: non-deductible, 50% deductible, and 100% deductible.
Non-deductible meals are those that have an entertainment component. In general, you can deduct 50% of the unreimbursed cost of most meals if an entertainment component is not present. The meals that are 50% deductible should have a business component. They can be meals while traveling, with clients or members of entities like the board of directors, Meals cannot be extravagant and either the business owner or an employee must be present. If an employer provides in-office snacks for employees such as coffee and donuts, 50% of the cost is deductible. Before the enactment of the TCJA, this was 100% deductible.
Meals that are 100% deductible apply to the business owner. The meals must be provided as a benefit for the employees in order to meet the 100% deductibility test.
A per diem rate can also be applied to lodging and meals if the actual costs are not used.
The per diem rate is established year by year by the IRS. There is a high and low per diem rate depending on the location to which you are going to be traveling.
Entertainment expenses are a red flag for the IRS. Entertainment expenses are a non-deductible business expense. Meals that are paid for on the same bill as entertainment are also not deductible.
It is vitally important to practice good recordkeeping for travel, meal, and entertainment expenses. Keep your receipts and keep mileage records in a journal you keep in your vehicle. This category of deductions is often a red flag to the IRS and you may be asked to prove your deductions if you are audited.
The Bottom Line
The TCJA of 2017 impacted the deductibility of transportation, meal, and entertainment expenses for business owners and employees. It's more important than ever to keep good records regarding transportation expenses although the major impact of the TCJA was not as evident for transportation expenses as it was for meal and entertainment expenses. Meals can fall into the categories of 100% deductible, 50% deductible, or non-deductible and cannot be associated with entertainment. Further guidance will be forthcoming from the IRS on meal expenses. Entertainment expenses are now non-deductible business expenses.