10%+ Owners Subject to Special Rules on Travel, Entertainment and Auto

Business owners have to be very careful with business-related travel and entertainment expenses. Improper and undocumented expenses deductions or reimbursements can result in heavy penalties and a tax audit of the company and its executives and owners.

Here are the major rules to help you comply and avoid penalty:

• All 1O%+ owners and family members employed by the business must fully itemize and document all travel, lodging, meals, and entertainment expenses. Family means you, spouse, parents, children, grandchildren, and siblings.
• You cannot deduct expenses for your spouse accompanying you on a business trip unless he or she is an employee of the company and his or her presence has a bona fide business purpose.
• For expenses over $75, you need receipts. Under $75, no receipt needed – just record the expense, business purpose, time, place, individual entertained and business relationship. Exception: for lodging expenses, receipts must be obtained no matter the amount.
• 10%+ owners cannot use the per-diem rate for deducting business meals and lodging.
• You cannot use the company car to commute to and from work unless the value of the personal use is included as taxable income on your W-2. There are special rules for other company employees; check with your accountant.
• You cannot take a personal tax deduction for business expenses for which the company could have reimbursed you.
• You cannot claim a tax deduction for travel, lodging, etc., for seminars and workshops when the primary purpose is vacation and enjoyment rather than education and/or sales.
• Owner and non-owner employees must keep contemporaneous records to substantiate all tax deductions. That includes a mileage log of each car use, including the driver’s name, purpose of trip, miles driven, and the date of each trip. These entries also should separate business from personal use.
• If an employee receives a reimbursement but does not properly itemize and document the expenses, the employer must include the reimbursed amount on the employee’s W-2.
• If an employee uses a company-owned auto for personal reasons, you are responsible for including the dollar value of that personal use on the employee’s W-2.
• If you reimburse yourself or an employee for more than the IRS allowed per-mile rate for business use of a personal auto, the excess reimbursement is taxable income to the recipient.
• On auto expenses, you must represent on your company’s tax return that adequate records have been kept.

If you or any employee fails to provide proper documentation of travel, auto or entertainment expenses, the expenses are not tax deductible by the company unless reported as taxable income on your W-2 or the employee’s.

What to do: Avoid denied deductions and penalties by adopting a written company policy that requires full documentation of expenses: (a) within a specific period (usually monthly) and (b) before you or the employee receives reimbursement.