No area of the tax law includes more tax opportunities - or more tax traps - than deductions for travel, transportation and entertainment expenses. The rules are complex and often difficult to understand. In addition, this is one of the IRS' favorite targets when conducting audits.

Away from Home - Expenses for business purposes are deductible. Deductible expenses include air and bus fares, meals and lodging, rental vehicles, transportation to and from airport and hotel, taxi, laundry and dry cleaning, and numerous others. Documentation of all expenses is critical. See the section on recordkeeping for specifics.

You may deduct 50% of entertainment expenses if they are "ordinary and necessary" business expenses. A deduction is allowed if the taxpayer can show the expenses are "directly related to" or "associated with" the conduct of a trade or business. The thrust of the discussion must be documented.

"Directly related" means the entertainment:

• involved an active discussion aimed at securing immediate revenue
  
• occurred in an obvious business setting

Expenses are generally NOT “directly related” when little or no possibility exists for actively conducting business. This includes night clubs, theaters, or sporting events.

“Associated with” means that the entertainment directly follows or precedes a substantial and bona fide business discussion. An entertainment expense is generally associated with the active conduct of the taxpayer's business if he can show a clear business purpose in incurring the expense. The taxpayer must show that he or his representative actively engaged in a discussion, meeting or negotiation to obtain income or to achieve some other specific business benefit.

The Revenue Reconciliation Act of 1993 expanded upon or changed some of the prior rules to include the following:

Only 50% of the cost of business meals and entertainment is deductible. The 50% rule also applies to meals on business trips away from home where no client or customer is present.

Employees To claim deductible expense on his/her 1040, an employee must combine the allowable 50% of meals and entertainment expense with other “miscellaneous deductions.” The deduction is limited to the amount of the expense that exceeds 2% of adjusted gross income.

Neither rule applies to reimbursed expenses. When the employer reimburses the employee, the employer may deduct 50% of the expense. The employee may not deduct these reimbursed expenses.

“Quiet Business Meals” are NOT deductible. Under prior law a meal with a business associate in an atmosphere conducive to business was allowed. Now a meal must meet either the “directly related” or “associated with” tests to be deductible. Also the thrust of the discussion must be documented.

No deduction is allowed where food and beverages are “lavish or extravagant under the circumstances.” This rule applies to all food and beverage expenses.

The taxpayer or his representative must be present when the food or beverages are furnished. You cannot deduct the costs of sending clients or customers to lunch on their own.

Travel for investment purposes or education cannot be deducted.

You must also have the following substantiation:

• Amount of each travel or lodging expense.
  
• Dates of departure and return and number of days spent on business away from home.
  
• Destination of travel.
  
• Business reason or benefit derived or expected from the travel.

• Amount of each separate entertainment expense.
  
• Date of entertainment event.
  
• Name, address, location and type of entertainment.
  
• Reason for entertaining, or business benefit derived or expected.
  
• Occupation or other information relative to the person(s) entertained such as name and title, which will establish the business relationship to the taxpayer.

• Cost and description of the gift.
  
• Date the gift was made.
  
• Reason for gift or business benefit derived or expected.
  
• Occupation of the person who receives the gift or sufficient information to establish his business relationship to the taxpayer.

Note: Annual business gifts of up to $25 per person are deductible.

• Date and amount of each separate expenditure with respect to the vehicle including acquisition, maintenance and repairs.
  
• Amount and date of each use of the car for business or investment and the mileage. (LSWG will gladly provide you with a mileage and expenses log book.)
  
• Business purpose of each trip.

Note: In addition to the above documentation, you should be able to answer the following questions regarding a "luxury auto":

• Total mileage driven
• Business mileage driven
• Commuting mileage driven
• Other personal mileage driven
• Percentage of business use
• Date placed in service
• Use of other vehicles
• After-work use
• Available evidence to support business use
• Whether evidence is in writing

Reimbursements that exceed actual expenses must be reported as income; expenses that aren't reimbursed can be deducted with proper documentation.

An employee who receives per diem allowances (for lodging and for meals) must provide the employer with time, place and business purpose.

Note: For all recordkeeping requirements, the burden of proof is on the taxpayer. The IRS can disallow a deduction without proper support. No estimates are allowed. You must keep a complete and accurate record. Any expense, no matter how small, must be noted in the log or diary. Receipts must be provided for all lodging and public transportation expenses; other expenses over $75 require a receipt.

You may deduct these expenses, but be meticulous in following the recordkeeping rules!