By Kendall Coleman  

Planning a business trip, conference, or a board meeting somewhere fun— Vegas? Hawaii? Bahamas? Though these trips are great for team morale, the IRS has been cracking down on corporate travel, so you must be aware of IRS guidelines in order to substantiate the deduction.  If you fail to provide adequate substantiation, you’ll not only incur additional taxes, but also risk additional interest and penalties. The best way to avoid unplanned tax expenses is to 1) select an appropriate location, 2) follow best practices for substantiation of the trip’s purpose, and 3) follow best practices for documentation of expenses.

1) Select an Appropriate Location

It’s generally much easier to substantiate a business trip within North America. Fortunately, the “North American region” includes the Caribbean Islands, Antigua, Barbados, Bermuda, Dominican Republic, Jamaica, Trinidad and Tobago, Saint Lucia and the US Virgin Islands, just to name a few.  The complete list can be found in IRS Revenue Ruling 2003-109, which can be easily accessed at www.irs.gov.

If you decide on a location outside of the “North American area” then you will need to make sure the location meets specified standards of reasonableness. If you fail to meet these standards, then no deduction will be allowed. As an example, let’s say you are attending a conference or convention.  The IRS will consider the following four factors:

  • The conference’s business purpose and activities.
  • The business purpose and activities of the sponsor company.
  • Where the sponsor’s active members reside relative to the location.
  • The location of past and future meetings.

So while North American trips are much easier to substantiate, trips to other parts of the world can be justified, especially if you have a dispersed workforce or have historically held trips at specific locations.

2) Follow Best Practices for Substantiation of the Trip’s Purpose

Before you can substantiate your expenses, the IRS requires that you maintain documentation to support that the trip was for legitimate business purposes.  If you fail to provide this evidence, plan on losing the entire tax deduction.

Generally, you need to demonstrate that the business purpose of the trip can pass a reasonableness standard.  I recommend creating a written memo that illustrates the trip’s specific business purpose, the business gain, and benefit you expect, and why the location you selected is appropriate.  If you can’t convince yourself in writing, it will be even harder to convince the IRS.

3) Keep a Detailed Record of Your Expenses

Once the legitimate business purpose is well documented, make sure that you’re keeping proper documentation of the actual expenses incurred on the trip. To substantiate general business expenses, you must be able to show proof of payment.  The IRS considers the following acceptable types of proof of payments.

  1. Canceled check
  2. Credit card charge as long as statement shows the amount, date and payee
  3. Electronic funds transfer as long as statement shows amount, date posted and payee

Not surprisingly, the IRS has much stricter substantiation requirements for business travel and entertainment expenses. The IRS will only allow a deduction for these expenses if you are able to meet the proof of payment methods above and meet the following four “adequate records” requirements.

  1. The amount of the expense,
  2. The time and place of the expense,
  3. The business purpose of the expense, and
  4. The business relationship to the individuals being entertained.

I recommend keeping a daily log or diary listing the types of business activities that were taking place.  When keeping the log, be sure to include the following information.

  1. Who – The name and title of the person(s) who incurred the expense,
  2. When – The date the expense was incurred,
  3. Where – The location including city, state, country,
  4. What – The specific type of expense (business lunch, airfare, networking reception),
  5. Why – Business activity and specific topics of discussions (not discussed taxes).

I often get asked about expenses relating to spouses. The cost of entertaining spouses, or the spouses of business associates, is not deductible unless you can clearly illustrate a business purpose in lieu of social or personal purpose for incurring the expense.

Now that you’re armed with the knowledge on how to substantiate your trip – you can go book your airfare!

---

The information contained in the Knowledge Center is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. In no event will CST or its partners, employees or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this Knowledge Center or for any consequential, special or similar damages, even if advised of the possibility of such damages.