One of the more enjoyable fringe benefits of many turfgrass professionals is traveling and entertaining with Uncle Sam picking up part of the tab in the form of tax deductions. What’s more, travel and entertaining can often help improve the bottom line of the landscape or lawn care business.
The Internal Revenue Service recently updated the rules for deducting expenses incurred while away from home traveling on business—That means travel to visit an equipment manufacturer or supplier, to attend a trade show or convention or any other travel that is business-related. Generally, the IRS has updated the rules for determining per diem rates that lawn care businesses can use to reimburse employee expenses for business travel.
Although many turfgrass professionals are considered employees of their own business, the revised guidelines contain an optional method under which both employees, even employees of their own businesses and self-employed turfgrass professionals who are not reimbursed, can utilize a per diem allowance in lieu of documenting each travel expense.
Whether the travel involves attending a meeting, seminar, trade show or convention or visiting customers or suppliers, our tax rules are pretty straightforward, allowing a tax deduction for the “ordinary and necessary” traveling expenses of every turfgrass professional. One major restriction on this deduction limits any tax deduction to the expenditures made while away from home in the conduct of a trade or business.
Largely because of the “away from home” requirement, travel expenses differ from local transportation or commuting expenses. Businesses may, of course, deduct local transportation expenses.
Generally, commuting expenses between an individual’s residence and a business location within the area of his or her “tax home” are not tax deductible. An exception is made for those whose principal place of employment is their home or for transporting job-related tools and materials. Naturally, someone who works at two or more different places in the course of a business day may deduct the costs of getting from one place to another.
For tax purposes, a landscape or lawn care professional can substantiate car expenses by keeping an exact record of the amount paid for gasoline, insurance and other costs. A more attractive alternative allows taxpayers to determine the amount of the allowable deduction by multiplying all the business-related miles driven during the tax year by the standard mileage rate. Don’t forget, the business portion of parking fees and tolls may be deducted in addition to the standard mileage rate.
A similar standard deduction exists in the area of travel expenses.
Per diem, per day
In order to claim tax deductions for travel and travel-related expenses, a professional must be able to prove that the expenses were, in fact, paid or incurred. A number of expenses, which our lawmakers deem as particularly susceptible to abuse, must also be substantiated by adequate records or by the professional’s own statement, corroborated by sufficient evidence: expenses relating to travel away from home (including meals and lodging), entertainment expenses, business gifts and all expenses in connection with use of so-called “listed property,” such as cars and computers.
Rather than maintain records and receipts, our tax rules allow a business owner or employee to utilize a flat-rate deduction, a “per diem allowance,” for meals, lodging and incidental expenses while away from home. The term “per diem allowance” means a payment or deduction of an expense for ordinary and necessary business expenses for lodging, meal and incidental expenses, or for meal and incidental expenses, while traveling away from home.
The IRS accepts a federal per diem rate that is equal to the sum of the applicable federal lodging expenses rate and the applicable federal meal and incidental expense (M&IE) rate for the day and locality of travel. The new per diem rate for travel to any so-called “high-cost locality” is $246, up from $226 for the preceding year, while the new per diem rate for travel to any other locality within the continental United States is $148, up from $141 for last year.
While self-employed professionals and employees whose expenses are not reimbursed may use a per diem rate to substantiate meals and incidental expenses while traveling away form home, the amount of lodging costs must be proven by documentary evidence (e.g., a receipt). The professional must also prove (through adequate records or sufficient corroborative evidence) the time, place and business purpose of the travel.
Note: Per diem rates may change at any time. For most current rates, visit www.irs.gov.
Although almost every lawn care and landscaping professionals can reap a tax deduction while traveling away from home on business, some of those expenses are subject to special limits. For example, with a number of notable exceptions, only 50 percent of meal and entertainment expenses are tax deductible.
Generally, the deduction for meals and entertainment is limited to 50 percent of the amount. That means only 50 percent of expenditures including:
- Taxes and tips
- Cover charges
- Amounts paid for parking.
Any expense that includes meals, entertainment and other services (such as lodging or transportation) must be allocated between the cost of meals and entertainment (generally subject to the 50 percent limitation) and the cost of other services. For example, the cost of a hotel that includes one or more meals in its room charge must be reasonably allocated between lodging and meals.
When a professional is reimbursed for travel expenses by another party and provides adequate documentation to the payer, the payer is subject to the 50 percent rule. Whether the lawn care business will be considered a third party when reimbursing the traveling expenses of an owner, shareholder or partner, is a question best left to the experts.
Tax deductions for eating
Generally, meals are deductible when they are eaten while the lawn care professional is traveling away from home on business; or fall into the category of business-related entertainment. A meal is deductible as entertainment only if the business owner or an employee is present at the time of the meal.
Naturally, expenses for meals and entertainment that are lavish or extravagant are not deductible. Fortunately, expenses are not automatically considered lavish merely because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs or resorts.
Although the tax rules limit deductions for entertainment expenses to those that are either directly related or associated with the lawn care business, it is not necessary to devote more time to business than to entertainment. If, however, the business discussion is only incidental to the entertainment, the entertainment expenses are not considered to be directly related to the lawn care or landscaping business.
The travel costs for a spouse, child or other individual who accompany a professional or worker on a business trip are not tax deductible unless that person meets all of the following conditions:
- Is the taxpayer’s employee or business associate. (A business associate can be a current or prospective customer, client, supplier, employee, agent, partner or professional adviser.)
- Has a bona fide business purpose for the travel.
- Otherwise would be allowed to deduct the travel expenses.
Just the facts
All traveling and entertainment expenses must be substantiated as to amount, time and place and business purpose. For entertainment and gift expenses, the business relationship of the person being entertained or receiving the gift must also be substantiated.
What’s more, to deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of each expense. Generally, entries in an account book, diary, expense report or similar record along with documentary evidence (e.g., receipts, cancelled checks or bills to support claimed expenses) are adequate to support a deduction.
A business purpose for an expense should be documented in writing. Naturally, the degree of proof varies according to the circumstances. If the business purpose of an expense is clear from the surrounding circumstances, a written explanation is not required.
The so-called “Cohan rule,” which has been used by the courts to estimate the amount of a taxpayer’s expenses when adequate records do not exist, may not be used to estimate travel or entertainment expenses. Naturally, if any landscape professional can establish that his or her records were lost due to circumstances beyond their control, such as destruction by fire or flood, then the professional does have a right to substantiate deductions using a reasonable construction of the expenditure.
The goal of every business is to make money and, in many lawn care and landscaping businesses, entertainment and travel contribute to a more profitable business. In addition to being an enjoyable fringe benefit, business-related travel and entertainment can also be quite economical, defrayed with some smart tax planning and utilizing the new IRS guidelines.
Mark E. Battersby is a frequent contributor to Turf, writing on financial and business matters. He resides in Ardmore, Pa.