[This article has been updated to reflect the new tax law that went into effect on January 1, 2018]
You took a few trips last year and now that it’s tax time, you’re deducting all of your travel expenses because it’s all cool, it’s all business, right? You’d better watch it. Some of your travel and entertainment expenses might not be as deductible as you think — and there are some twists to the rules that may impact your tax bill.
There are many small business tax deductions you should know about. You can reduce your taxable income you pay if you take advantage of breaks and opportunities that are out there. Here are some examples straight from IRS Publication 463, “Travel, Entertainment, Gift, and Car Expenses,” which covers this sort of thing.
1. The mileage reimbursement rate went down
If you (and your employees) are using the IRS’s standard mileage reimbursement rate to deduct expenses for travel outside of the normal commute, you may be taking too much of a deduction. Every year we’re used to the rate going up. But in 2017 … it went down. Last year the rate was 54 cents per mile. This year it’s 53.5 cents per mile. Why? It’s likely the lower cost of fuel.
2. Your home may not be your home
To determine whether you are traveling away from home, you must first determine the location of your tax home. According to Publication 463, generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. If you have more than one regular place of business, your tax home is your main place of business. If you don’t have a regular or a main place of business because of the nature of your work, then your tax home may be the place where you regularly live. Confused? Move to Canada.
3. Your rental car isn’t completely deductible
Sure, you’re using the car to visit a customer in Nashville. But are you taking a little side trip to check out Andrew Jackson’s Hermitage for a day? Good for you. You’ll learn a little U.S. history. But you better not deduct the cost of your rental car because that was a non-business use.
4. You might want to get that shirt ironed
You do all of your own laundry and iron your shirts while at home. But c’mon … you’re on the road and baby, it’s time to live it up. Go for the gold. Get those shirts dry-cleaned. Get your undergarments washed. The cost is deductible.
5. Watch out for “lavish” expenses
Just because it’s “business” doesn’t mean it’s totally deductible. The IRS gives its auditors the leeway to determine if a business expense is “lavish” or not — and the definition is open to interpretation. This may be why you want to stick to eating at Outback Steakhouse instead of Ruth’s Chris … but that risk is entirely up to you.
6. You can relax: Costs of telegrams are deductible
Thank goodness, you say. According to Publication 463 which was — and I’m not making this up — revised in December 2016, the “costs of telegrams” remain a deductible travel expense. The cost of searching for a place that still sends telegrams in 2018 is up for discussion.
7. You can deduct the cost of a cruise (Well, some of it)
In what seems like a genius move, some people apparently are using cruise ships as means of business travel. However, the IRS is savvy to these smart people and has imposed a limit on what you can deduct. For example, if you took a Disney Cruise to your business meeting last May, you can only deduct $688 per day maximum. You can also deduct up to $2,000 per year on expenses for attending conventions, seminars, or similar meetings held on cruise ships. The cost of Weight Watchers after the cruise is not included.
8. You can only deduct 50% of your meal expenses
This rule has been around for a while, but a lot of my clients forget it. It’s worth remembering when you’re about to spring for another $200 bottle of wine at dinner. Beer is just as good.
9. You remember that Coldplay ticket that cost you $500? I have some bad news…
The concert wasn’t that great. And the 2018 Tax Cuts and Jobs Act both giveth and taketh away: Business entertainment expenses are no longer deductible, beginning with the 2018 tax year. As Alistair M. Nevius, writing for the Journal of Accountancy states, “The act disallows a deduction for … an activity generally considered to be entertainment, amusement, or recreation …” You may want to think twice before springing for playoff tickets or booking that luxury box to impress your best client.
10. Your club dues and membership fees aren’t deductible either
Many of my clients forget this. You join the country club so that you can use it for business meetings and activities. Enjoy. Play golf. Drink wine. But don’t deduct the expenses. Because … you can’t. Publication 463 says you can’t deduct dues paid to country clubs, golf and athletic clubs, airline clubs, hotel clubs, and “clubs operated to provide meals under circumstances generally considered to be conducive to business discussions.”
11. Business gifts are limited to $25
You can deduct no more than $25 per person for business gifts you give directly or indirectly during your tax year. A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift. If you give a gift to a member of a customer’s family, the gift is generally considered to be an indirect gift to the customer. Humbug.
12. Keep your receipts for three years
That’s the rule. It starts with when the return was due to be filed (even if you filed after).
13. Don’t worry about your contractor’s accounting
Are you unsure if your independent contractor is accounting for his travel and entertainment expenses with you correctly? Don’t worry about it. Just make sure you’re reporting everything you pay him on a 1099 (assuming it’s more than $600) at the end of the year and let him worry about it.
See how much smarter you are now than you were just a few minutes ago? If you’re so obliged, I’m open to all cash gifts … Just keep it under $25, okay?
Join writer and small business owner Gene Marks each Wednesday on the Small Biz Ahead podcast. You can also submit a question for Gene to answer on the podcast.
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