As you likely know by now, your travel meals continue under tax reform as tax-deductible meals subject to the 50 percent cut.
And tax reform did not change the rules that apply to your other travel expense deductions.
One beauty of being in business for yourself is the ability to pick your travel destinations and also deduct your travel expenses. This article gives you a big leg up, with a dozen questions and answers that help you properly document and audit-proof your business travel expenses.
Q&A 1: Corporation or proprietorship?
Question. Are the business travel documentation rules different if I operate my business as a corporation versus as a proprietorship?
Answer. Yes and no.
Not different. With deductions for lodging, a meal, or other travel expenses, the rules governing receipts, business reasons, and canceled checks are the same for corporations, proprietorships, individuals, and employees.
Different. If you operate as a corporation, the corporation is a separate legal entity from you. You are an employee of that corporation. To get the best tax results, you need to know that because of the recent tax reform, employee business expenses that were deductible in years past are not deductible at all during tax years 2018 through 2025.1
That’s good news, actually, because you should never have claimed your business travel deductions as employee business expenses to begin with. Why? Because tax law put those business deductions in that ugly category where expenses were reduced by 2 percent of adjusted gross income and also subjected to the totally unfair alternative minimum tax (AMT).
Now, because of tax reform, you have no choice if you want the deductions. You need the travel expenses on the corporation’s books, and you need to properly document them:
- If you pay the expenses personally, you need the corporation to reimburse you based on a properly submitted expense report.
- If you use a corporate credit card or corporate check for the expenses, you need to document the expenses for the corporate books.
Q&A 2: Do I Have to Keep a Tax Diary for My Business Travel?
No, but the combination of the timely records you keep must prove the four elements below:2
1. Amount. The amount of each expenditure for traveling away from home, such as the costs of transportation, lodging, and meals.
2. Time. Your dates of departure and return, and the number of days on business.
3. Place. Your travel destination described by city or town.
4. Business purpose. Your business reason for the travel, or the nature of the business benefit derived or expected to be derived.
Q&A 3: Is There an Easy Way to Keep a Tax Diary?
Yes. I use a #10 plain white envelope. Then as I accumulate my expenditure receipts I place them in the #10 envelope. On the outside of the envelope I’ll summarize the expenses. If I happen not to get a receipt I’ll write out the details on a post it note (or equivalent). The IRS won’t challenge the post it note as long as you’ve got the majority of the trip’s receipts in the envelope. This system captures the four elements that the IRS requires mentioned above.
If you don’t like paper, google “app to capture travel expenses” (without the quotes), and you will see myriad online apps for capturing travel expenses.
Q&A 4: Why Are Travel Meals Separated from Other Travel Expenses?
Lawmakers don’t like the meals you eat while traveling. To prove their point, they enacted a 50 percent cut in your tax deductions for travel meals.
Q&A 5: Do I Need Receipts?
Yes and no!
When in tax-deductible travel status, you need a receipt, a paid bill, or similar documentary evidence to prove:
- every expenditure for lodging, and
- every other travel expenditure of $75 or more, except transportation, for which no receipt is required if one is not readily available.
Q&A 6: What Is a Receipt?
The receipt is a document that establishes the amount, date, place, and essential character of the expenditure.
Hotel example. A hotel receipt is sufficient to support expenditures for business travel if the receipt contains
- the name of the hotel,
- the location of the hotel,
- the date, and
- separate amounts for charges such as lodging, meals, and telephone.
Restaurant example. A restaurant receipt is sufficient to support an expenditure for a business meal if it contains the
- name and location of the restaurant,
- date and amount of the expenditure, and
- number of people served, plus an indication of any charges for an item other than meals and beverages, if such charges were made.
Q&A 7: Credit Card Statement and Canceled Checks
Question. Can’t I simply use my credit card statement as a receipt?
Answer. No. Your credit card statement is like a canceled check. It proves only that you paid the money, not what you purchased. To prove the travel expenditure, you need both the receipt (proof of purchase) and the canceled check or credit card statement (proof of payment).
Q&A 8: What Is a Timely Kept Record?
The IRS says a log maintained on a weekly basis that accounts for activity during the week creates a timely kept record. This is good. In other words, the IRS deems that when you keep a weekly or sooner log, you meet the requirement to record your travel expenses at or near the time you spend the money.
One surefire way to prove that you have a timely record is to make handwritten notes on the receipts when you are signing the slip to charge your credit card. For example, if you were at the 123 convention, you would note “123 convention” on the receipts.
In this case, you would either make separate notes about the trip’s business purpose or simply keep the 123 convention program that shows your business purposes.
Q&A 9: $75 Rule Allows Cheating
Question. Since I don’t need a receipt for a travel expense under $75 other than lodging, how does the IRS know that I’m not cheating?
Answer. Where did you get the cash to pay the expense? Did you make an ATM withdrawal? Did you cash a check? You can see that the IRS has many ways to know.
Q&A 10: Should I Keep Receipts If the Expense Is under $75?
Yes. We can think of no reason not to keep the receipt, regardless of amount.
Think about it. The receipt backed by a credit charge is proof positive. When the travel expense is less than $75, the IRS allows you to simply write down the expense, but this writing is not proof positive like the receipt backed by the credit card charge.
We advocate proof positive for your travel records. This helps the IRS imagine that you have great records for all your expenses
Q&A 11: What Are Travel Expenses?
In a nutshell, a travel expense is an expense of getting to and from the business destination and an expense of sustaining life while at the business destination. Here are some examples from the IRS:
Costs of traveling by airplane, train, bus, or car between your home and your overnight business destination
- Costs of traveling by ship (subject to the luxury water travel rules and cruise ship rules) Costs of renting a car or taking a taxi, commuter bus, or airport limo from the airport to the hotel and to work destinations, including restaurants for meals
- Costs for baggage and shipping of business items needed at your travel destination
- Costs for lodging and meals (meal costs include tips to waiters and waitresses)
- Costs for dry cleaning and laundry
- Costs for telephone, computer, Internet, fax, and other communication devices needed for business
- Tips to bellmen, maids, skycaps, and others
Q&A 12: Submitting Travel Expenses to Your Corporation
When you operate your business as a corporation, keep in mind that the corporation is a separate legal entity (person) from you.
And as you know from above, tax reform eliminates employee business expense deductions for tax years 2018 through 2025.
This means that any business expense you pay personally has to be submitted to the corporation for reimbursement or you don’t get any tax benefits. You want to do this submission under an “accountable plan.” Essentially, this means you will submit the expenses in a manner that documents the expenses in accordance with the IRS rules.
One simple way to do this is to give your corporation your Tax Diary System pages for reimbursement, supported by the appropriate receipts.
If you prefer, you can submit to the corporation an expense report that satisfies the IRS requirements for the travel deductions. This means proving where you were and why, along with documenting that the travel record submitted or summarized was kept on a timely basis, and that the expense report contains the required receipts.
Finally, consider using a corporate credit card and properly documenting the expenses. With this method, make sure you settle any cash advances and cash out-of-pocket payments with the corporation on a timely basis, meaning within a week. You can do this with entries in the books of account, with reimbursement to/from petty cash, or by check to/from the corporation.
The travel deduction rules are the same whether you operate your business as a corporation or a proprietorship, with one important exception. When you operate as a corporation during the tax years 2018 through 2025, you must either
- have the corporation reimburse you for the expenses or
- have the corporation pay the expenses.
In all cases, whether you’re in a corporation or proprietorship, you must prove:
- Amount. The amount of each expenditure for traveling away from home, such as the costs of transportation, lodging, and meals.
- Time. Your dates of departure and return, and the number of days on business.
- Place. Your travel destination described by city or town.
- Business purpose. Your business reason for the travel, or the nature of the business benefit derived or expected to be derived.
You also must gather the proof and document the deductions on a timely basis, which means within one week.
Hope this helps,