THE CRAFTS REPORT
TRAVEL EXPENSES -
IRS REQUIRES CERTAIN DOCUMENTATION
It's time we hit the road again; it's show and fair season! Before we leave home, though, it will be helpful to review the rules IRS has for documenting our travel expenses. We want to be sure we don't loose any deductions if we're audited, just because we didn't dot all the i's!
CODE SECTION 274(d) - WORTH KNOWING ABOUT!
This area of travel expenses has apparently been abused by taxpayers over the years, so Congress in response has formulated stricter rules for these expense. IRS enforces those rules. For other business expenses, we are required to have a recordkeeping system and it is good to have the receipts to prove what we've entered in our system is true. However, it is possible to be allowed business deductions even if we don't have receipts and canceled checks to prove them. That is called the "Cohan rule" from a court case where Mr. Cohan was able to establish the reasonableness of certain deductions he claimed, even though he didn't have the receipts to prove them.
The Cohan rule does not apply in the area covered by Section 274(d) of the Internal Revenue Code. This section prescribes specific documentation that must be shown if deductions for business travel are questioned. WITHOUT THIS DOCUMENTATION, IRS HAS THE RIGHT TO REJECT YOUR DEDUCTIONS! The rules separately cover deductions for travel, meals and business gifts.
TRAVEL EXPENSES
Business travel expenses include amounts spent for public transportation (plane, train, bus, taxi) and lodging (hotel, motel). Expenses for meals and entertainment have their own set of rules and documentation requirements. I'll cover them in detail next month.
You MUST have receipts for the airplane and hotel or IRS can throw out your deduction. I'm not joking. They seem to enjoy doing it! You may be able to prove, perhaps from your passport or other receipts, that you did indeed go to a show in Paris, but unless you can produce the actual airline ticket, you will not be allowed to keep the deduction.
Notice that I am not saying you cannot claim the deduction! I believe you should claim all the deductions you truly paid for and which you truly believe meet the overall tests of being ordinary, necessary, and reasonable. Just know that if you are audited, you may lose some of those deductions if you don't have the required receipts and other documentation.
Other documentation? Yes, there's more. You also need to have written down, perhaps in a daily log or journal, the following information:
the dates of departure and return for each trip and the number of days spent on business;
the destinations or localities of the travel, and
the business reason for the travel or the nature of the business benefits obtained or expected.
There's another rule, too. The cost of getting there and back, the transportation expenses, are deductible on an all or nothing basis. They are fully deductible only if the "primary" reason for the trip is business. If the business aspect is secondary to personal reasons, the transportation costs are not deductible at all. If you are unsure whether a trip is primarily business, you may want to discuss it with your tax advisor before you go. Then it would be good to write down your reasoning so you won't have to try to remember three years later when you're being audited!
THE EMPLOYEE SPOUSE TRICK
And now for the good news! Or, rather the good news in the bad news. In last year's tax bill, Congress imposed a new rule that can affect the travel expense deductions of many crafters. It says that the expenses of a family member accompanying you on a trip will no longer be deductible, even though they perform actual vital services for the business (a bona-fide business purpose) ....UNLESS.. unless they are an employee of the business!
Moan and groan! I know, the last thing you want to deal with is payroll taxes and all those forms and penalties! However, there is a silver lining. The plan may seem a little far-fetched, but there is pretty good authority for it. If your spouse becomes your employee (and really does work in the business!), you may decide to offer health insurance benefits to your employees. (Check with your insurance carrier to find out if you can include part-time employees in your group plan.) A business that pays for its employees' health insurance can deduct the cost of that benefit and they are not required to include it in the employees' W-2's as additional income.
Your employee-spouse can then have family coverage, which will cover you of course, and the premiums will be fully deductible as a business expense. As you know, that will serve to lower your self-employment taxes as well as your income tax! That kind of deduction is a lot better than the deduction for 30% of health insurance premiums Congress so graciously granted to self-employed persons in the same 1995 tax act.
There are other versions and ramifications of this deal that you may want to explore with your tax advisor. For instance, it may also be appropriate for the business to provide a medical reimbursement plan, disability insurance or group term life insurance for its employees. The best course will be unique to your own business situation.
RECEIPTS NEEDED FOR EXPENSES OVER $75 -
THE NEW RULE!
The final good news is that IRS has recently raised the level of business expenditure that you are required to keep receipts for. Of course, you still need to have the receipt for the plane and the hotel, but for the incidental expenses (and for meals) you only need to be able to produce the receipt for expenses over $75. All you have to do is record the actual expense in your recordkeeping system!
