The daily expenses struggle
Business meal and vehicle expenses are two of the expenditures that the IRS will pay particularly close attention to.
Why? Because they are arguably two of the easiest expenses to falsify and they can represent a surprisingly large expenditure for your business activities.
Your ability to deduct these expenses will depend on a number of factors—that we will get into shortly—but they must generally be considered “ordinary and necessary.”
In a previous blog post, we discussed how you can determine what expenses you are able to deduct when traveling for business. Here we established exactly what constitutes your tax home. When you are away from your tax home, expenses related to business activities outside of this area can be deducted.
But, when it comes to meal and vehicle expenses, things get a little more complicated.
Before we get on to the do’s and don’ts, it’s important that we touch on some of the particular rules that will affect how much you will be able to deduct.
General rules for meal and vehicle expenses
If you want to use your own vehicle for business purposes, you may be able to deduct the expenses following one of two methods. The “standard mileage rate” and “actual car expenses.”
If your car is leased, there are specific rules that affect the number of leasing payments you can deduct as actual expenses. The calculations will vary depending on the year in which your lease started, the value of the vehicle, and the distribution of use between business and personal use.
To use your vehicle using the standard mileage rate, set in 2020, the cost of operating your car for business is 57.5 cents ($0.575) per mile.
With regards to meal expenses, it is important to note that you are no longer able to make deductions for activities considered to be for entertainment, amusement, or recreational purposes. Examples include entertaining guests at nightclubs, sporting clubs and events, and theatres.
However, you can continue to deduct 50% of the cost of business meals if you or your employee are present and the food and beverages are not considered to be lavish or extravagant. The meals may be provided to a current or potential business client and will need to be purchased separately from the entertainment if they occur at the same time.
This limit applies to employees, their employers, and to self-employed persons (including independent contractors) or their clients. Examples of meals would include those you have while traveling away from your tax home—alone or with others—and meals at a business convention or similar situation or business league meeting.
The dos and don’ts for travel and food expenses
It is crucial that you maintain meticulous records to substantiate any business expenses for meals and travel deductions.
DO keep your receipts! This probably seems like a no-brainer but we have all misplaced a receipt at some point. Make sure that when it comes to business expenses, your receipts are kept secure. This also applies to canceled checks and bills that show amounts and the date. Keep track of the exact number of miles driven and take photos of the mile counter just in case.
DO keep track and record the purpose of all business expenses. Those moments when you are questioning whether an expense could be perceived as personal are exactly why this is so important. On the surface, expenses of this nature can often appear personal so you need to make it very clear that it is indeed for business.
Remember that these are all open to interpretation from the IRS so you want to err on the side of caution at all times and document the business purpose.
DON’T wait to re-create your expense logs at the end of the year, or when the IRS has contacted you with a deficiency notice. It’s strongly advised to record the details of any travel or food expense at the time of the event or very soon after. Apart from anything, it is significantly easier for you to track expenses as you require them than to try and back-track later.
If your employees require expense reimbursements, make sure that they submit all expenses at the end of each month.
DO require all of your employees to comply with a simple set of expense rules (or best practices if you prefer). If you are reimbursing your employees for expenses, they must provide you with proper documentation.
You should also be aware that these reimbursements are treated as taxable compensation to the employee—subject to income tax and FICA withholding—unless they are made via an “accountable plan” which is one that follows the IRS’s regulations for reimbursing workers.
Keeping the IRS happy
When it comes to vehicle and meal expenses, it is almost a guarantee that the IRS will ask you to prove your deductions. They are a magnet for attention, so you should do everything you can to record the specific nature of the expenses, in a timely manner.
It is always important to respect the fine line between personal and business expenses to avoid any nasty surprises, and as a general rule, you should never use your business checking account for personal expenses.
Without wanting to sound like a nagging parent, the more strict you can be regarding these expenses and your efficiency in keeping track of every last detail, the less likely you will run into any problems with the IRS.
If you have more specific questions relating to meal and vehicle expenses, contact us today and our remote operating team will be more than happy to help.