The costs of business travel and entertainment (T&E) expenses are susceptible to IRS scrutiny because such expenditures may reflect personal as well as business objectives. Therefore, there are many requirements to be met in order to deduct these expenses.

Detailed record keeping is a must for travel and entertainment deductions. No deduction is allowed for any T&E item, which is not substantiated by adequate records. An “adequate record” is a contemporaneous diary, account book, log, expense statement or similar record. Additionally, in the following cases documentary evidence (e.g., receipts, paid bills, cancelled checks) must also be furnished: all expenditures for lodging while away from home and any other expenditure of $25 or more. You don’t need receipts for local transportation (e.g., taxis) where such receipts aren’t readily available. Minor incidental expenses, such as tips, may be approximated (but must be entered in your diary or log). Documentary evidence may be adequate by itself; a diary or log entry may not be necessary, if the document discloses the amount, date, place and character of the expenditure.

Business Meals & Entertainment

Only 50% of the cost of business meals and entertainment is deductible.
An employee’s meals/entertainment deductions must be aggregated with “miscellaneous deductions.”
The “quiet business meal” is no longer deductible.
No deduction is allowed for food and beverages, which are “lavish or extravagant under the circumstances.”
The taxpayer must be present when food or beverages are furnished.
Travel for investment purposes or for education cannot be deducted.

Travel costs

The taxpayer must prove, via diary, receipts, etc., all of the following: the amount of each separate expenditure for traveling away from home; the dates of the departure and return home for each trip, and the number of days spent on business away from home; the destination or locality of the travel; and
the business reason for the travel or the nature of the business benefit derived or expected to be derived as a result of the travel.

Business entertainment expenses

The taxpayer must prove all of the following: the amount of each separate expenditure for entertaining, except that incidental items like cab fares and telephone calls may be aggregated on a separate basis;
by the date the entertainment took place; the name, address or location, and the type of entertainment;
the reason for entertaining, or the nature of the business benefit derived or expected to be derived as a result of entertaining, and the nature of any business discussion or activity that took place; and
the occupation or other information relative to the person or persons entertained, including name, title or other designation, sufficient to establish his business relationship to the taxpayer.

Business gifts

The taxpayer must prove all of the following: cost; when the gift was made; the reason for making the gift or the nature of business benefit derived or expected to be derived as a result of the gift; occupation or other information about the person receiving the gift, including his name, title, or other designation sufficient to establish his business relationship to the taxpayer; and description of the gift. The cost of ordinary and necessary business gifts may be deducted up to $25 a year to any individual.

Travel Away from Home

Expenses incurred while traveling away from home for business purposes are deductible. Deductible travel expenses include meals and lodging enroute and at the destination, baggage charges, air, rail and bus fare, cost of transporting sample cases or display materials, expenses for sample rooms, costs of maintaining or operating a car, telephone and telegraph expenses, laundry and dry cleaning costs, cost of a public stenographer, cost of transportation by taxi, etc., from the airport or station to the hotel, from the hotel to the airport or station, from one customer or place of work to another, transportation from where meals and lodging are obtained to the temporary work assignment, and reasonable tips incident to any of these expenses.

Mixed business and pleasure trips

Transportation costs to and from your destination are deductible only if the trip is related primarily to the taxpayer’s business. If the trip is primarily for business, but the taxpayer extends his stay for personal reasons, makes side trips, or engages in other non-business activities, he may deduct only the expenses, such as meals and lodging, that he would have incurred if the trip had been totally for business, but no allocation is required for transportation costs to and from the business destination.

Foreign travel: Only the amount directly allocable to business is deductible in the case of a mixed purpose foreign trip. Even where the travel is primarily for business, a portion of transportation, meals, and lodgings, etc., expenses of the business part (as well as all the pleasure part) is nondeductible. The nondeductible part is computed on a time ratio, usually in the proportion of non-business days to all travel days.

This allocation and denial of deduction is not made if 1) the taxpayer, if an employee, isn’t related to his employer and isn’t a managing executive; 2) travel is for one week or less; 3) less than 25% of the time is spent in non-business activity; 4) the individual traveling had no substantial control over the arranging of the trip; or 5) a personal vacation was not a major consideration in making the trip.

Education, investment travel: The costs of travel as a form of education are not deductible, nor are the expenses of traveling for investment (as opposed to business) purposes.

Entertainment

Entertainment expenses are deductible if they are “ordinary and necessary” business expenses and strict substantiation requirements are met. But no deduction is allowed unless the taxpayer can show that the entertainment expenses are: 1) “directly related” to the active conduct of a trade or business, or 2) “associated” with the active conduct of a trade or business.

Taxpayers may entertain business associates or other persons with whom the taxpayer could reasonably expect to engage or deal in the active conduct of his trade or business. Examples of business associates are customers, suppliers, clients, employees, agents, partners, or professional advisors, whether established or prospective.

Entertainment expenses are deductible if they are “directly related” to the active conduct of the taxpayer’s trade or business. This test is met if the entertainment is 1) involved in an active discussion aimed at getting immediate revenue, 2) occurred in a clear business setting such as a hospitality room or 3) the expenditure must be reported as compensation for services performed by an individual other than employee.

Entertainment expenses that do not meet the “directly related” test but that are “associated” with the active conduct of the taxpayer’s business are deductible if the entertainment directly “precedes or follows” a substantial and bona fide business discussion.

Entertainment facilities: No deduction is allowed for any expense paid or incurred with respect to “an entertainment facility” used in conjunction with an activity that is of a type generally considered to constitute entertainment, amusement or recreation. A deduction is now specifically not allowed in the case of social, athletic, sporting and other clubs dues even when the taxpayer establishes that the facility was used primarily to further the taxpayer’s business and that the item was directly related to the active conduct of that business.

Expenses incurred with regard to entertainment facilities that are disallowed include yachts; hunting lodges, fishing camps, swimming pools, tennis courts, and bowling alleys. Fees paid to any social, athletic, or sporting club or organization is treated as expenditure for an entertainment facility.