Note: The Tax Cuts and Jobs Act has eliminated the deduction for 50 percent of the costs of entertaining clients and customers for amounts paid or incurred after December 31, 2017. Food and beverages provided during entertainment events are not considered entertainment if purchased separately from the event. You can still deduct 50 percent of the cost of food and beverage expenses associated with operating a trade or business (e.g., meals consumed by employees on work travel.) However, for 2018 to 2025, the deduction for miscellaneous itemized deductions subject to the 2-percent floor, including unreimbursed employee expenses, has been suspended, and cannot be claimed as an itemized deduction on Schedule A. If you are an employee, you will not be able to deduct your unreimbursed expenses.
What Is It?
If you take deductions for travel, meal, or entertainment expenses and they are challenged or questioned by the IRS, you must have either written evidence, or written evidence from another person, to substantiate your deduction claim. Moreover, since the IRS tends to scrutinize such deductions closely, your travel, meal, and entertainment expenses, if examined, will generally be disallowed unless you have records that satisfy certain statutory and regulatory requirements.
What Types of Records of Travel, Meal, And Entertainment Expenses Will Comply With IRS Rules?
In the event of an audit, the IRS generally requires that you have two types of evidence to back up your deductions for expenses.
- A written record (this can be in the form of a diary, accounting book, or other written record) that details the time, place, and business-related purpose of the travel expense or entertainment expense
- Documentary evidence, which can include itemized payment slips, receipts, or other written records showing you paid for specific travel or entertainment expenses that cost $75 or more
Exceptions to IRS Record Rules
There are a number of exceptions to the rules listed, including the following:
- You will need a written record showing you paid for all lodging expenses, even if an expense was for less than $75.
- Transportation expense receipts are required only when such written receipts are readily available.
- You cannot use a canceled check alone to back up a deduction claim. If your only record is a canceled check, you may be required to obtain a copy of the bill from the payee or a written statement from a witness (such as a business partner) stating the business purpose of the expense.
Diary or Accounting Book Records
Your diary or accounting book records of your travel, meal, and entertainment expenses need not exactly duplicate information shown by the required receipts and vouchers you retain to back up your deductions (although, the more detailed your written record, the better). You should note in your written record all business-related travel, meal, and entertainment charges paid via a credit card.
Special Requirements for Entertainment Expenses
The records you keep of entertainment expenses should list the following:
- Date of entertainment
- The names of the people entertained
- Your business relationship with those you entertained
- Where the entertainment took place
- The entertainment's business purpose
- The nature of the business discussion or activity
What Constitutes an Acceptable Receipt?
For a receipt or voucher to be acceptable to the IRS, it must show the following:
- The date and amount of the expense
- Where the expense was incurred and the nature of the expense
Receipts from restaurants must list the following:
- The restaurant's name and location
- The number of people served
- The date of and the amount of the expense
- An itemization of any additional nonfood or beverage expenses
Receipts from hotels or other places of lodging must list the following:
- The hotel's or other place of lodging's name and location
- The amount of the expense, including an itemization of lodging expenses and separate nonlodging expenses, such as phone calls, food, and beverages
How Long Should You Keep Your Records And Receipts of Travel, Meal, And Entertainment Expenses?
You should keep your travel, meal, and entertainment expense records for at least three years after the date on which you file the tax return on which the deductions are claimed.
What If You Can't Produce Written Records That Meet IRS Rules?
If you can show you made a good-faith effort to comply, the IRS will not necessarily disallow a deduction simply because all record requirements were not met.
If you keep a diary detailing all of your travel, meal, and entertainment expenses and you have retained the required receipts backing up most but not all of these expenses, the IRS may determine that you acted in good faith and may not disallow the few deductions for which you don't have required receipts.
Exceptions to Record Rules
If your records of travel, meal, and entertainment expenses are destroyed due to circumstances out of your control (e.g., in a fire), you can back up your deduction claims by reconstructing these records, as long as the reconstruction is deemed reasonable. In addition, if you can demonstrate that you were unable to comply with IRS record-keeping rules due to the inherent nature of the situation in which an expense is incurred, the IRS may accept evidence of the expense that does not strictly comply with their rules.
What If You Are Self-Employed?
If you are self-employed, you must keep the same records detailing your travel, meal, and entertainment expenses as you would if you were an employee. However, rather than deduct these expenses on your Schedule A, you report them on your Schedule C.
Tip: Reporting business expenses on Schedule C is more favorable, because travel, meal, and entertainment expenses reported on your Schedule C are not subject to the 2 percent adjusted gross income floor that these expenses would be subject to if reported on Schedule A.
Caution: Your business-related meal and entertainment expenses may be subject to the 50 percent limitation.
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