Travel and Entertainment (T&E) expenses are costs incurred for business purposes while traveling away from home or for activities related to client, customer, or employee entertainment. These expenses must be both ordinary and necessary for the business to be eligible for tax deductions.
Ordinary and Necessary Expenses
- Ordinary Expense: Common and accepted in a given field of business, trade, or profession.
- Necessary Expense: Helpful and appropriate to the business.
Non-Deductible Expenses
Lavish or extravagant expenses are explicitly non-deductible.
Deductibility of Travel and Entertainment Expenses
Travel Expenses
Travel expenses refer to costs incurred while traveling away from home for business purposes, which may include:
- Airfare
- Lodging
- Transportation (e.g., taxi, rental cars)
- Meals
- Incidentals (e.g., dry cleaning, tips)
To qualify as travel expenses, these costs must be both ordinary and necessary for the business activities.
Entertainment Expenses
Entertainment expenses are those incurred for client, customer, or employee activities and include:
- Social events (e.g., night clubs, sporting events, theaters)
- Meals at social, recreational, or athletic clubs
50% Deduction Limitation
Under the Tax Act of 1993, only 50% of entertainment expenses and business meals are deductible. For instance, if $200 is spent on a business meal, only $100 is deductible.
Special Considerations
Substantiation Requirements
To deduct travel and entertainment expenses, you must provide:
- Evidence of the business relationship to the individual entertained.
- Documentation of the amount, time, place, and business purpose.
Record Keeping
Maintain accurate records, such as receipts and logs, to substantiate the expenses. The IRS requires you to have detailed records for every expense claimed.
Examples of Travel and Entertainment Expenses
Example 1: Business Conference
An employee travels from New York to San Francisco for a business conference. Deductible expenses include:
- Airfare: $500
- Hotel: $800
- Meals (limited to 50% deduction): $300
- Taxi: $100
- Miscellaneous expenses (e.g., tips): $50
Total deductible T&E expenses: $500 + $800 + ($300 * 50%) + $100 + $50 = $1,600
Example 2: Client Dinner
A business owner takes a client out to dinner for discussion on a potential deal. The meal costs $200. Under the current tax code, the deductible amount is 50% of the total cost, i.e., $100.
Historical Context
The regulation of T&E expenses has evolved over time, with significant changes under the Tax Act of 1993 and subsequent amendments aimed at curbing excessive deductions:
- Pre-1993: Full deductibility of business meals and entertainment.
- 1993 Tax Act: Introduction of the 50% deduction limit.
- Further Revisions: Continued emphasis on substantiation and tightening of what constitutes an ordinary and necessary expense.
Comparisons and Related Terms
Comparisons
- Personal Expenses: Non-deductible Personal, Living, and Family Expenses as per IRS regulations.
- Employee Reimbursements: Reimbursements for expenses differ in taxation treatment when paid under an accountable plan vs. a non-accountable plan.
Related Terms
- Accountable Plan: An arrangement that meets IRS requirements, allowing employer reimbursements to be excluded from an employee’s income.
- Per Diem Rates: Set daily rates for lodging, meals, and incidentals used instead of actual expense reimbursements.
FAQs
What qualifies as a 'necessary' business expense?
Are expenses for spouses deductible?
Can I deduct business meals?
References
- IRS Publication 463, “Travel, Entertainment, Gift, and Car Expenses”
- Tax Act of 1993
Summary
Travel and Entertainment (T&E) expenses, when ordinary and necessary, are deductible for business purposes. Understanding the distinctions between deductible and non-deductible expenses and maintaining accurate records are critical for compliance with IRS regulations. The 50% deduction limit on business meals and entertainment highlights the importance of substantiation and judicious expense management.
