Meals and Entertainment and Vehicle Expenses are two of the most scrutinized audit categories by the Internal Revenue Service. Below are the requirements for the allowable deduction of such expenses and the necessary documentation needed to substantiate the expenses.
Meals and Entertainment
1. Meals and Entertainment are deductible if:
a. You are traveling away from home. If you are traveling for business purposes and it is necessary for you to stop for rest while traveling, then your meals while traveling are also deductible.
b. You are entertaining a client:
i. The main purpose of the meal/entertainment must be business. This includes new business or the continuation of an existing business relationship.
ii. You must expect some future business benefit from the meeting.
iii. The expense must be one that is common to your type of business and is a necessary part of your business.
iv. There must be a substantial business discussion. It does not need to be for any specific length of time. Also, if the business meeting is to take place at an entertainment event, it does not need to take place during the event.
2. Tips, cover charges, and parking fees are includable in meals and entertainment.
3. Club dues and memberships are not a deductible business expense.
4. Necessary documentation includes receipts and a record of the client.
5. Generally meals are only 50% deductible. There are exceptions such as when self-employed reimbursements are included in income. Meals are 100% deductible when promoting goodwill among employees.
Vehicle Expenses and Mileage
1. Mileage can be deducted in the following situations:
a. Mileage from home to a temporary work location (temporary typically means one year or less).
b. Mileage from your first job to your second job.
c. Mileage from your Home Office to a job location. This means if you file an Office in Home form with your tax return, you can deduct mileage from your home.
2. Vehicle loan interest can still be deducted even if the mileage rate is used instead of actual costs for self-employed individuals only.
3. Deductible actual expenses include depreciation, licenses and registration, gas, oil, insurance, tolls, parking, garage rent, lease payments, insurance, repairs and maintenance.
4. Necessary documentation includes a mileage log and any receipts for actual expenses deducted.
These expenses apply to self-employed individuals and unreimbursed employees. However, there is a deductible of 2% of gross income for employee business expenses. This means that only expenses that exceed 2% of the gross income on your tax return are deductible. Please call or email us if you have any questions about whether or not your business expenses are deductible.