According to the IRS, travel expenses are defined as “the ordinary and necessary expenses of traveling away from home for your business, profession, or job.” The IRS also includes a line explaining that you cannot deduct any expenses that are lavish or extravagant or that are for personal purposes.
There are two possible reasons to keep accurate business trip expense records: for tax return deductions or for company reimbursements.
For either purpose, you must be able to substantiate your business expenses. The best way to do this is to keep accurate records while on the trip; if you wait until you get home, you might forget expenses or lose receipts and other necessary documentation. You can maintain your expenses on your PDA, personal organizer, or in a handwritten diary. The important thing is to hold on to all sales receipts and any additional information that explains the reason for the expense. For the sake of simplicity, use several columns and label them accordingly:
- Means of travel — e.g., air, car, train
- Ground transportation
- Other miscellaneous — e.g., books, periodicals, or business journals
Organize your expenses into the above categories, list each expense separately, and include the amount spent, the date, and the time. Also document the purpose of the expense. For example, if you were taking a prospective client to lunch to potentially gain their account, say so in writing. Next, label the receipts so you know which goes with which entry. You should also keep your canceled checks and credit card statements as proof of payment, which many companies require along with the expense report.
Entertainment expenses are frequently contested claims on expense reports, both by the IRS and by employers. From nightclub visits to sporting events, how you define entertainment depends on who you ask. The question the IRS and your employer will be asking — and therefore the question you should ask yourself — is whether the entertainment expense is business related. You can take clients to an event in order to forge a new relationship, to secure an existing one, or to make a sale. If such activities are in line with marketing yourself and your business, then such expenses will be considered valid.
For example, if you’re a talent agent, theater tickets correspond to your profession. When dealing with the IRS you can typically only claim the face value of tickets, not broker’s fees or surcharges.
Another potential problem area is mixing business with pleasure. If you rent a car on your business trip and use it for business purposes — getting to and from meetings, going out for meals — but you also take in a baseball game on a free afternoon, you can’t expense the mileage to and from the ballpark or the cost of the tickets. Expenses for business and pleasure must be differentiated.
While IRS policies are clearly outlined in IRS publications and on the IRS Web site, companies can — and typically do — set up their own policies and guidelines for reimbursing employees. All policies should be in writing and should explain what qualifies as acceptable documentation for business expenses and when business reports must be submitted. Your well-kept documentation and organized business expense report should tell the story of your business trip. Be sure to read Developing a Travel Policy if your business has yet to institute a business travel policy.