Is your company headed for trouble with its travel expenses?
Thanks to videoconferencing technology and high gas prices, business travel may not be as common as it used to be. Yet it goes on nonetheless, and companies can’t slack off on the proper tracking and reporting of travel expenses. The IRS, as always, is watching.
Home, tax home
Generally, deductible out-of-town travel expenses are an employee’s ordinary and necessary expenses of traveling away from home for work. “Away from home” means his or her job duties require the employee to be away from the general area of his or her “tax home” substantially longer than an ordinary day’s work, and the employee needs to sleep or rest to meet the work demands while away from home.
For most people, their tax home is their regular place of business. But there are special rules for employees who work in multiple places, are on the road most of the time or are on a temporary or indefinite job assignment away from their regular place of business.
An employee doesn’t necessarily have to stay away from home overnight to satisfy the rest requirement. If he or she travels for business purposes throughout the day but returns home that night to sleep, the worker may still be considered “away from home” for tax purposes.
Last year, the IRS announced that it would even allow deductions for local lodging expenses if the lodging is temporary and necessary for an employee to participate in or be available for a bona fide business meeting or function. In addition, the expenses involved must be otherwise deductible by the employee as a business expense (or be expenses that would otherwise be deductible if paid by the employee).
Generally airfare, taxis, rental cars, lodging, meals (subject to the limitations discussed below), business phone calls and tips are tax-deductible. You can’t write off “lavish or extravagant” travel expenses, so be prepared to prove that any patronage of a high end restaurant or hotel was reasonable under the circumstances.
Generally only 50% of business-related meal or entertainment expenses are deductible. If the employer reimburses the employee under an accountable plan (more on this under “Accountable vs. nonaccountable,” below), the 50% limit will apply to the employer rather than the employee.
Deductions for lodging — and for other travel expenses greater than $75 — generally must be substantiated with adequate records, such as credit card receipts, canceled checks or bills. Records should indicate the amount, date, place, essential character of the expense and business purpose.
Accountable vs. nonaccountable
For companies that reimburse their employees’ travel expenses, there are tax advantages to having an accountable plan. If you satisfy the requirements, reimbursed travel expenses are deductible by the company, excluded from employees’ income and exempt from FICA and other payroll taxes.
If your plan is nonaccountable, the company still gets a tax deduction, but reimbursed expenses will be subject to payroll taxes and included in employees’ income as salary. Employees may then be able to deduct some or all of the expenses, but only if they itemize and only to the extent the expenses and other “miscellaneous itemized deductions” exceed 2% of their adjusted gross income.
A variety of factors establish whether a plan is accountable. Reimbursed expenses must have a business connection — that is, the employee must have paid or incurred deductible expenses while performing his or her job.
In addition, workers need to adequately account to the company for these expenses within a reasonable time, usually within 60 days after the expenses are paid or incurred. And employees must return any excess reimbursements or advances within a reasonable time, usually within 120 days after the expenses are paid or incurred.
Boots on the ground
Most companies need to put “boots on the ground” in other locales throughout the year. Make sure the business and your employees are following the rules that bring tax benefits, not unwanted IRS attention.
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