From train tickets to restaurant bills, your employees are bound to incur a number of expenses when they travel for business purposes. However, if they’re not careful, these costs could add up and eventually put a substantial dent in your profits. So, how much should you, as a small business owner, allow your employees to spend on their travel and meal expenses? In episode # 153, Gene Marks and Elizabeth Larkin discuss the various factors you need to consider when calculating your employees’ spending limits.
1:18—Today’s Topic: How Much Can My Employees Spend on Travel Expenses for Business Trips?
1:49—Under the newly reformed tax laws, meals are considered 50% deductible if they are work-related.
2:50—Entertainment expenses are no longer eligible for tax deductions.
4:02—Any travel or commuting expenses incurred on behalf of your small business are fully deductible as well.
5:00—You should use the reimbursement limits set by the IRS as a guide when determining the how much your employees can spend on business-related travel and meals.
8:09—Gene encourages small business owners to offer 401K’s since both business owners and their employees can financially benefit from these retirement policies.
Submit Your Question
Elizabeth: Welcome back to the Small Biz Ahead podcast. I’m Elizabeth Larkin from The Hartford and I’m here with Gene Marks who is a small business owner and small business expert from the Marks Group.
Gene: What are we talking about today Elizabeth?
Elizabeth: Today we’re going to talk about meal and travel expenses.
Gene: And entertainment.
Elizabeth: And entertaining.
Elizabeth: If you’re a small business owner, you might be wondering how much leeway can I give my employees on that?
Gene: Yeah, I mean the rules have changed.
Elizabeth: They have.
Elizabeth: After we hear from our sponsor, we’ll be right back and we’re going to answer Susan from Suffolk, Virginia’s question about meal and travel expenses.
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QUESTION: How Much is Too Much For Meal and Travel Expenses?
Elizabeth: And we’re back. So here is Susan’s question, again she’s from Suffolk, Virginia. She doesn’t tell us what kind of business she runs.
Elizabeth: We’ll make that up.
Elizabeth: But here’s her question, very short and sweet quote, “How much is too much for meal and travel expenses?” Gene, I’m going to let you answer.
Gene: Elizabeth it’s just a tax question and the rules have changed over it from the year. Let’s do three things. Okay. Meals, entertainment and travel.
Gene: Fair enough? Okay. Let’s start with meals to begin with. Meals now are 50% deductible, and when you define a meal that means a meal that you’re having with an employee, it could be an internal meal, or with a customer or a vendor, but business has to be discussed at that meal. Your onus of proof I mean, how can an auditor audit that? Did you discuss business while you were having a meal with Chris? And you’re like, sure, sure we did.
Elizabeth: If you and I go downstairs to The Hartford cafeteria after this, can you expense 50% of that?
Gene: The answer is as long as you and I discuss business and you and I always discuss business. I mean most of it is monkey business, like TV we’re watching or podcast we’re listening to or other stuff.
Elizabeth: What books we’re reading.
Gene: Yeah. But like what I would say that we discuss a little bit about the podcast and other Hartford related things.
Elizabeth: Also since my boss is probably listening to this.
Gene: It’s all professional and the up and up. Yeah, 50% of your expenses, if you’re talking about meals they are related. Now, entertainment is a different story. 0% of your entertainment expenses can be deducted if-
Elizabeth: Can you define entertainment that’s when your … so let’s say as a small business owner, you have a sales person, they take someone out for a meal, they discuss business, you can deduct 50% of that.
Gene: Right. And then you go to a ballgame or I don’t know, you go to a show, or you go to a club or you go out, that’s considered to be something like entertaining.
Elizabeth: You go to a lot of clubs?
Gene: Stop, stop. Okay. We’re talking, just a ball game. Let’s keep it at that. Okay?
Gene: None of that is deductible.
Gene: Even if you discuss business the entire time, it’s still not a deductible thing. Another thing about entertainment, just be careful, your country club fees and your golf club fees and whatnot. They are not deductible either. Okay.
Gene: That is considered to be entertainment too.
Elizabeth: And that’s new?
Gene: Yeah. A lot of these have changed with the tax reform act. Yeah, their roles became more stringent. Now, certain things that are deductible is if you do pay like dues for like an association or Chamber of Commerce and even though some of the stuff, there the activities might be somewhat considered to be entertainment.
Elizabeth: Now, what about travel? Let’s say you have a salesperson … I realize that’s not the only person that’s going to be traveling, it’s just the easiest example.
Elizabeth: Let’s say they’re taking a train, and I did this recently, I took a train into New York City, I expensed it.
Elizabeth: The Hartford paid for it.
Gene: The general rule of travel … first of all there’s travel, there’s commuting. Okay. Just so we know about commuting is that you can deduct any … if you’re a salesperson in the area, any expenses over your normal commute to the office.
Gene: You live what? A hundred yards from this place or something.
Elizabeth: Pretty much.
Gene: Yeah. If you do any type of traveling outside of that for The Hartford, that’s like a deductible expense for The Hartford, if you’re getting reimbursed for those costs.
Elizabeth: Fully deductible.
Gene: They’re the IRS mileage rate, fully deductible. Your trip into the city, if they send you into New York on a visit, that’s fully deductible. Clearly, it’s got to have a business purpose, but travel expenses-
Elizabeth: I was just going in to see a show.
Gene: Yeah. Right. And then there’s entertainment, not a club, the show. Just want to make sure of that.
Elizabeth: All right. Bringing this back to Susan’s question, you’re a small business owner. How do you set limits on things? Like, I understand you can’t really set a limit on a travel expense. It is what it is.
Elizabeth: It’s not set by, you can’t choose. If you live in Hartford, Connecticut and you’re going to … I actually have a team member who’s in San Diego right now. You’re going to take a flight like that is set by the airlines. You can’t take like-
Gene: That’s correct.
Elizabeth: You can’t choose to take like, I’m going to take a $5 flight as opposed to…
Gene: Yeah. The IRS doesn’t get into that. If you buy a first class ticket or an economy ticket, it’s still a deductible expense.
Elizabeth: How do you set that?
Gene: As long as there’s a business purpose to it.
Elizabeth: A small business owner, how do you set limits on meals and travel expenses?
Gene: Well, there’re certain things about reimbursement that you’re allowed to do. Okay. The IRS has certain rules over reimbursement and depending on whether if it’s meals or daily rates, anywhere from 25 to 50 bucks a day, that you can reimburse somebody and get a deduction for it.
Elizabeth: Okay. There’s actually …
Gene: There is.
Elizabeth: Okay. Wonderful.
Gene: And the same thing with mileage on your car, and if you know what the rate is now? I think it’s like around 32 cents a mile.
Gene: For any travel, again that you’re driving around outside of your commute to the office you can reimburse.
Elizabeth: Where would you find where those limits?
Gene: You can Google the IRS and say mileage limits or travel and entertainment limits, they change every year and there’s certain per diem amounts.
Elizabeth: They’re probably pretty low though. I mean, what if you want to be able to-
Gene: Well, the way that you get around it is, is if the company just pays for it straight out because these are reimbursement limits.
Gene: Because anything over that is considered to be income to the employee.
Gene: Right? What you want to try and do is if you are having your employees out and about and traveling, you want as the company to try and pay everything as directly as possible. You have the hotel bill you directly, you pay it, you have your own travel agent booked the plane whatever, you pay it, then you take a hundred percent of that.
Elizabeth: What would you set for the Marks Group? You do have a lot of people out.
Gene: We do.
Elizabeth: They take them out to lunch. Do you have a set limit of don’t spend…
Gene: Yeah. We comply with the IRS limits. Again, it’s $25 out of pocket is what I allow our people. Now again, it might have increased a little bit since, but that’s for meals for example, that we can reimburse them for. But remember even if we reimburse them for the $25 for a meal, we can only deduct 50% of that.
Gene: It used to be 100% but now it’s 50%.
Elizabeth: Did they find that that’s enough?
Gene: Yeah. I mean, listen it’s Philly. If you’re going to go for lunch, $25 is usually plenty.
Elizabeth: Okay. Great.
Elizabeth: All right. We’ll be right back with Gene’s word of wisdom.
WORD OF BRILLIANCE: 401k
Gene: Elizabeth, the word of brilliance today is, and it’s only one word, if it’s a word. 401k is that like a-
Elizabeth: It’s not a word, it’s a name.
Gene: It’s a name. It’s sort of a numeric.
Elizabeth: I’ll let it go. Acceptable.
Gene: Okay. So 401ks are defined contribution retirement plan. It is a plan where they are popular, but the way that they work is that … I’m sure you’ve got one here at The Hartford, we’ve got them at the Marks Group as well. An employee can put money away pretax, an employer like myself can match that money going away pretax as well. The more your employees put away, the more you can put away as well as an employer for yourself, and then it grows-
Elizabeth: Wait, back up what?
Gene: Well the more your employees can put, they contribute to the 401k, the more I contribute to my 401k and while save-
Elizabeth: Your personal 401k.
Gene: Correct. And the reason why, is because if you have a company plan, a 401k plan, say you’ve got 10 employees, but just I’m the owner and only I contribute to that 401k plan, it will probably fail at some point the discrimination tests that the IRS does, the Department of Labor has for it. You can’t have a lopsided benefit plan. If you’re going to be contributing to a 401k plan, it’s got to be like in context with what your employees are also contributing as well.
Elizabeth: Okay. All right.
Gene: And it’s encouraging, especially we encourage employers that they can’t just set up a plan that just benefits themselves. It’s got to benefit everybody and it’s also trying to motivate employers.
Elizabeth: Nothing you haven’t tried though, right?
Gene: I have tried in the past, it’s just, benefit myself at the expense of my employees, then the government doesn’t let me get away with it.
Elizabeth: Now you know that your most important assets are your employees.
Gene: Are my employees. Not only that, but it’s important with 401k plans to remember that, the more your employees put money away into a 401k plan, not only does it help them with retirement, but if you want to be selfish, it helps you as well. Because I see dozens of times with clients where they have an older employee that did not put money away for retirement, and then they want to retire and they can’t. And who are they going to go back to? They go back to their employer and they’re like, I didn’t put enough money away for my retirement what can we do?
If you’re a small business owner, and you’ve got a loyal employee, you’re not going to leave them hanging so you’re like okay, well let’s see if we can work something out. You don’t want to be in that situation. You want your employees to be financially independent and stable. You want them to contribute as much as possible.
Elizabeth: To get that natural attrition when they leave.
Gene: Correct. It really benefits you to have your employees put money away for themselves, not only so that they’re more self sufficient, and they can retire, but also again, like I said earlier, the more they put away, the more you can put away as well.
Elizabeth: What are the limits this year? How much can employee, is it-
Gene: $18,000 is how much can be contributed to a 401k. And then if you have a 401k, you get your own IRA, and that’s another $7,000 you contribute to that.
Elizabeth: And you can also do both?
Gene: That is correct. Okay. The 401k plans, they’re inexpensive to set up. They’re very inexpensive to administer. A lot of companies, a lot of banks and financial services firms, they’ll set you up with a 401k plan for next to nothing, because they know they get their investment fees once you pick it up. Now, couple of things about the 401k is that, the government wants to help you. As part of the tax reform act of 2017, there’s a new rule which says if you, the small business that has less than a hundred employees starts a 401k plan, then you will get a $500 a year credit against your taxes just for starting up the 401k plan.
Elizabeth: Per employee?
Gene: No. Total.
Gene: And it’s a credit. If you owe $3,000 in taxes, you will get a $500 credit against it for three years.
Elizabeth: What if you don’t know?
Gene: The credit will carry forward actually because it’s a credit.
Gene: It’s a really big benefit for employers. And the reason why the government is doing that is, well there’s two reasons. One is that there’s a retirement crisis that’s looming in this country.
Elizabeth: All those baby boomers.
Gene: Not Enough people, were not putting money away, man for the future. And number two was like you read study after study, it’s like 50% of small businesses have 401k plans. And I meet people that don’t have 401k plans all the time. And it amazes me it’s a great benefit to offer your employees.
Elizabeth: If you want to set it up where do you start, your accountant?
Gene: You can talk to your accountant or talk to an attorney, go to your bank is another good one. Or if you just Google 401k plan or set up, I mean all the banks have financial services arms that can get you going there, but you can Google around, you’ll find a lot of big companies-
Elizabeth: Anything to look out for particularly or watch out against?
Gene: Yeah. You want … your 401k plans, obviously there’s a cost involved. It definitely ranges on the investment fees that these people charge based on the assets that you have. You want to compare what those fees would be. The second also is the choices that you’re given. Remember when you set up a 401k plan, you can offer your employees and obviously yourself different investment choices, treasury bond fund, index fund, stock fund, whatever. The more choices that you’re offered with more reputable investments vehicles, the better it will be for both you and your employee.
There were new rules around 401k plans that they give fiduciary responsibilities over employers. Which means that if you do start a 401k plan, you’re required to notify your employees, make sure they know what their choices are, and you also have the responsibility like you can’t just offer like lousy funds or risky funds or things like that. It has to be well balanced or else you could be liable. If you work with a good 401k provider like your bank, or a good financial services company, they will walk you through all of that and take care of it.
Gene: There’s good ones, there’s Northwest Mutual, there’s Principal Financial, there’s Fidelity, there’s Vanguard. They all offer these kinds of things.
Gene: Get a 401k plan.
Elizabeth: What do you think the time and money investment upfront is for a small business owner?
Gene: Minimal and minimal. I would say setting up a 401k plan would be hundreds of dollars to get it set up and you’ll make money when you apply for that tax credit. And as far as the time involved, you can have a 401k plan set up in a few days. It’s just a matter of educating your employees. One thing Elizabeth, that I do come across is that some employees are like reluctant to put money away. And some people that might come from parts of the world where they like to stuff it under a mattress, that’s what they’re used to.
You do have like some educational challenges, you have to teach your employees to do that. And like I said earlier, it benefits them to put the money away, and also the more you can educate your people, the more it benefits you.
Elizabeth: And you’re better off the more people who are maxing out their 401k?
Gene: Yeah. That’s correct. The more people that are contributing to their 401ks, the more balanced your plan is and the less discriminatory it is.
Gene: At the end of each year for your 401k plan, a tax return has to be filed and I’m certain tests are done on it and that’s done by the people administering your plan.
Gene: And that’s part of the service that they provide. They run these discrimination tests and if you’ve been putting all this money away, pretax into your 401k plan, and then they run the discrimination tests that it’s saying like, not enough of your employees were contributing. Not only do you have to either take that money back, or you can leave it there, but you’ll be taxed on it because it shouldn’t be put in pretax, you’re have to pay money on that, so you don’t get the benefits of what a 401k is.
Elizabeth: Okay. Great. Really good tip today Gene.
Gene: Good stuff.
Elizabeth: As opposed to all your other ones.
Gene: This one was a better one, definitely a better one.
Elizabeth: Totally. Totally.
Gene: I’ve got a great tip on our next podcast as well come to think of it as well, so stay tuned.
Elizabeth: Great. All right. Our next podcast will be about email marketing mistakes to avoid, which I know is one of your favorite.
Gene: Oh, boy.
Elizabeth: All right. Thanks for joining us today everyone.
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