New Rules Change the Deduction Itinerary

With this year’s tax returns still fresh on everyone’s minds, it’s not too soon to start planning for next year, especially for people who travel frequently on business.

Business travel and entertainment deductions have always been one of the grayer areas of tax preparation, but the 1993 Tax Act contains some features that will make it tougher than ever for travelers to claim expenses as deductions.

What’s more, many employers are encouraging Saturday night stays to get better air fares, which means more people are combining business and pleasure by taking family members along on business trips, a move that complicates travel deductions. And with more companies hiring people for temporary assignments, the line between business travel and normal employment expenses is blurred even further.

For IRS purposes, travel means that your duties require you to be away from your main place of business longer than an ordinary day’s work and that you need to rest or sleep while you are away. If the purpose of your travel is related to producing income or maintaining income-producing property, then you are allowed to deduct certain costs, including transportation, meals, entertainment, cleaning and other incidentals.

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Whether you can actually take the deduction, however, requires that you meet certain conditions. You can only deduct costs for which you were not fully reimbursed. If, however, your reimbursement was treated as taxable income on your W2 form, then you can deduct your costs under miscellaneous employee expenses. To claim a deduction, the miscellaneous expenses must exceed 2% of your adjusted gross income.

Now for the bad news. One of the biggest changes affecting business travelers this year is that the deduction for business meals and entertainment is limited to 50% of the expense, not the 80% previously allowed, effective Jan. 1, 1994.

For individuals, the best strategy for dealing with this change is to negotiate to have your firm pay your travel expenses in full and take the deduction rather than have you pay.

“If you are an employee, make sure it’s your employer taking the 50% hit, not you,” said Nadine Gordon Lee, a partner with the accounting firm Ernst & Young who works in the personal tax and financial counseling group in New York.

If you can’t negotiate a reimbursement plan that compensates you fully for your out-of-pocket expenses, your only other recourse is to keep your costs as low as possible and keep good records so you can support claims for all your potential deductions. And remember that any amount you spend in excess of your reimbursement would be subject to the same 50% rule when you deduct it as a miscellaneous employee expense.

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The other major change for business travelers starting this year is that expenses for a spouse traveling with you can no longer be written off.

The IRS guidelines are more stringent, Lee said. “You are certainly walking alone when you travel on business in 1994.”

Previously, the IRS would allow you to deduct your spouse’s expenses if your employer required your spouse’s presence and if you could document that your spouse spent time on business and that his or her presence helped business prospects. And when traveling in many parts of the world, including a spouse on business was expected.

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However, beginning in 1994, an accompanying person’s expenses are deductible only if he or she is a legitimate employee of the same company, traveling for a bona fide business purpose. A good rule is to ask yourself whether your spouse would be able to deduct the travel if he or she went alone, Lee said.

Yet another change effective in 1994 is that dues for clubs, including airline clubs, will no longer be a deductible expense.

In addition to the newest changes, one change effective in 1993 is worth remembering in 1994.

As of Jan. 1, 1993, you can only deduct travel expenses for up to one year if you are in a temporary job assignment away from home. If your job lasts more than a year, your travel costs are not deductible because your job assignment is considered indefinite, not temporary.

That means that if you accept a temporary two-year assignment away from your home base, your travel costs are not deductible. And because you are still maintaining your home, you can’t deduct your costs as moving expenses, either.

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The test the IRS uses to determine if a job is temporary is whether there is a “realistic expectation that the assignment would not exceed one year,” Lee said.

So, if what starts out to be a yearlong assignment actually takes 18 months, you can deduct the first year. The reverse is not true, however. If you accept an assignment that is expected to take 18 months and you wrap it up in 10 months, you are not entitled to the deduction. If you took the deduction, and were audited, you would have to document that the job was originally expected to last less than a year, not the 18 months.

Tax Tips for Travelers

Here are some additional tax strategies gleaned from financial advisers and from the Ernst & Young Tax Guide, 1994.

* Seek reimbursement for travel-related expenses from your employer before trying to deduct them. You can only deduct your expenses if they exceed your reimbursement, but the IRS considers it your responsibility to ask your employer for the money first. If you don’t ask, you can’t deduct.

* Get a policy statement from your company (or a letter from your supervisor) that says you may have to incur non-reimbursed expenses to fulfill your job. This helps establish that your expenses are “ordinary and necessary” for doing your job while away from home.

* Keep good records. Guesstimates aren’t good enough. Make sure you keep a log with dates, amounts and purposes of all business travel-related expenses. Using a credit card when you travel is a handy way to keep track of expenses, but use a diary as well to log items such as cab fares that you can’t charge.

* Before accepting a new work assignment that requires traveling and staying away from home, establish in writing whether the work assignment is considered temporary (less than a year) or not.

* Keep track of all your expenses. Some frequently overlooked deductions include the cost of laundry and cleaning while on the road, or the cost of shipping extra baggage, if it includes sample or display material related to the purpose of your trip.

* Make sure you keep all course outlines and educational material from any courses or seminars you attend. Business and career education expenses have attracted interest from the IRS in recent audits, especially continuing education courses held at resort locations, Lee said. As a rule of thumb, “if you view it as a boondoggle, so will the IRS.”