Tax time is a very stressful time for a great majority of people. Small business owners can be especially nervous. “What form do I use? Is this the right attachment? What is a business expense, and what isn’t? What type of expense is this one? Can I prove if necessary? Is this fully deductible as a legitimate business expense, or can I claim only a portion of it?” Boil all those common questions down to the core issue that will prove or disprove legitimacy and type, and the battle is almost won. The most common mistakes small business owners make, though, is correct categorization of travel and entertainment expenses and how to properly document those receipts.
Entertainment v Travel Food Expenses
This is one of the most commonly misdirected-expense categories for businesses. The difference in deduction categories centers around purpose, timing and environment.
If you attend a seminar that causes you to travel away from your home city, for example, your transportation mode is a travel expense. If you drive a vehicle, that means your car rental and insurance costs are business travel expenses. Your fuel is also a deduction, but it may not at 100 percent; check with the IRS for current deduction percentages. Include mileage in your annotations.
Your hotel room rental amounts are travel expenses, but your food and drink bills may not be, and this is where people make costly mistakes.
If you pick up the tab for lunch during that seminar, and the intent and agenda during that meal was to discuss business, that’s a business lunch deductible under travel expenses. However, if you are “schmoozing” clients or colleagues, that is not a travel expense but an entertainment expense even if it’s during the same time frame or location as the seminar. Categorize it as such.
No longer is the IRS accepting just names, location and dates as proof of business deductions on taxes. You must also note a brief outline of what was discussed. No confidential or proprietary information has be recorded permanently on that receipt, but you must outline the gist of the content.
For example, as you drive from Denver, Colorado, to Lincoln, Nebraska, you stop for lunch in a diner. On that meal receipt, you ensure the date and the restaurant name is on the receipt. If the name of the server is noted, all the better. On the back, you note, “Meal during drive to…” and note the organization and reason you’re headed there. That is a travel expense.
If you travel with a client or colleague when you stop, and if you discussed the conference you will attending, that’s a travel expense. If you talk about families, hobbies or non-business topics, that bill is an entertainment cost.
Home v Away
Many small business owners do not know that you don’t have to be traveling away from your home city to incur travel-related or entertainment-related, tax-deductible expenses. You just won’t have a plane ticket to declare.
Mileage you drive a private vehicle can accumulate quickly. So can the amount of fuel that you use and its accompanying cost. Keeping accurate mileage and fuel consumption records can be tedious, boring and dreaded. It’s entirely necessary, however.
Whether you keep at-moment records or you use the voice memo option in your mobile phone to note starting-trip mileage, stop mileage, the cost of fuel at the time and your purpose in traveling – a very, very crucial element, your written records and your receipts for any money spent during that trip from start to finish, are exceptionally crucial. “Guestimates” are not acceptable to the Internal Revenue Service. The IRS has increased its investigation into deduction verification, and if you cannot present acceptable documentation, toss your deduction into the “due with interest and penalty” pile.
Be thorough. Be complete. Be conscientious, and be accurate. If you are, you can be assured that your tax filing will be less intimidating and fraught-filled than it used to be. Remember: It is far better to have a documented receipt that you don’t need than it is to discover too late that you really should have kept better expense records.
by Jaye Ryan, who loves writing about responsible financial management and taxes for Octopus Loans.
Travel v Entertainment Expenses for the Small Business Owner