As an employee, you may be able to claim a tax deduction for your un-reimbursed business-related travel and entertainment expenses as a miscellaneous itemized deduction on Schedule A.  These expenses, combined with any other miscellaneous deductions you may have, are deductible to the extent they exceed 2% of your adjusted gross income.  But there are some exceptions to the 2% limit rule.

• Armed Forces Reservists, who travel more than 100 miles from their home in connection with their service in the Reserve may be able to claim their travel expenses as an adjustment to income rather than as an itemized deduction.
• State and local government officials who are paid on a fee basis can claim trade or business expenses as an adjustment to income rather than as a miscellaneous deduction.
• Performing artists may be able to claim their business expenses as an adjustment to income rather than itemizing deductions.

Ordinary and Necessary

In order to be deductible, you must have actually paid or incurred the expenses; they must be for carrying on your trade or business of being an employee, and they must be “ordinary and necessary”.  An expense is deemed to be ordinary if it is “common and accepted in your trade or business”, and it is necessary if it is “appropriate and helpful to your trade or business”.  An expense does not always have to be required in order to be considered necessary according to this definition.

Reimbursed Expenses

If you are an employee and:

• you fully account to your employer for all your business-related expenses,
• you received full reimbursement,
• you were required to return any excess reimbursement, and
• there is no amount reported on your W-2 Form, in box 12 with code “L’,

you do not need to show the expenses or the reimbursement on your tax return.

Accounting to your employer means that you turned in receipts and records, such as an expense report, that shows the amount, time, place, and business purpose of each expense.  You will also be considered as having accounted to your employer for your expenses if:

• Your employer paid you a fixed amount as an allowance for expenses, such as a per diem, or
• Your employer reimbursed you for your vehicle expenses at the standard mileage rate or another flat rate or fixed schedule.

Form 2106 or 2106EZ

As an employee, if you have travel, entertainment, and gift expenses that were not reimbursed by your employer, or you had actual expenses that were more than the per diem or other allowance you received, you can deduct them if they are ordinary and necessary, and are business-related.  Normally you would need to file Form 2106, Employee Business Expenses, or the simplified Form 2106EZ, Unreimbursed Employee Business Expenses.  If your expenses are not deductible because of the 2% of adjusted gross income limit on miscellaneous itemized deductions, you do not have to file Form 2106 or 2106EZ.

Travel

You can deduct travel expenses if you are away from home on a temporary work assignment for your employer.  If you are on an indefinite assignment, your travel expenses are generally not deductible.

Temporary Assignment

A temporary assignment is one that is expected to last, and does last less than one year, unless circumstances indicate otherwise.  But a temporary assignment may turn into an indefinite assignment if circumstances change.  An indefinite assignment is one that is realistically expected to last more than one year, whether or not it actually lasts that long.

Traveling Away From Home

You are considered to be traveling away from home if your duties require you to be away from the general area of your tax home substantially longer than an ordinary day’s work, and you need to sleep or rest to meet the demands of your work while you are away from home.

Tax Home

Since the definition used by the Internal Revenue Service for traveling away from home makes reference to your “tax home”, you must first determine where your tax home is located.  Your tax home is generally your regular or main place of business or post of duty, including the city or general area in which your business or work is located.

Your family home may not necessarily be the same as your tax home for these purposes.

• If your family home is in one location and your tax home is in another, different location, you cannot deduct the expenses of traveling between the two.  But if you do not have a regular place of business, your family home may be your tax home.
• If your work part of the time in the area where your family home is located, but you work the majority of the time in another location, this other location could be your main place of business, and therefore your tax home.  In this case, you may be able to deduct your expenses while you are working in the area of your family home.

If you have more than one place of business or work, some of the factors to be taken into consideration in determining which is your main place of business (your tax home) include:

• The total amount of time you normally spend at each location.
• The level of your business activity in each location.
• The amount of income you earn at each location.

Travel Expenses

 Once you determine that you traveled away from your tax home on a temporary assignment, you can deduct the following types of travel expenses:

• Fares for travel by air, rail, bus, or car for travel between your home and your business destination
• Taxi, commuter bus, or airport limousine fares
• Baggage charges
• Expenses of operating your vehicle while traveling away from home.  You can use actual expenses or the standard mileage rate, plus tolls and parking.
• Meals and lodging (There is an optional standard meal allowance rate, described below, but there is no standard rate for lodging.  You will need to keep track of your actual lodging expenses.)
• Cleaning and laundry expenses
• Business telephone calls
• Tips and other incidental expenses.  You can keep track of your incidental expenses, such as tips, or you can use an optional amount of $3 per day while traveling away from home, but only if you did not pay or incur meal expenses that day.

If you have one expense (such as a hotel bill) that includes different types of charges, for example, lodging, meals, entertainment, or transportation, you need to separate or allocate the cost of meals and entertainment, since they are subject to limitations

Travel Expenses of Another Person Traveling With You

Normally, you cannot deduct the expenses of another person who travels with you, unless that person:

• Is your employee
• Has a bona fide purpose for the business travel, and
• Would otherwise be allowed to deduct travel expenses.

For example, you could not deduct the travel expenses of your spouse or dependent unless they meet the above conditions.

Personal Expenses on a Business Trip

If your trip was entirely business-related, you can deduct all your travel expenses.  If you combined your trip with a vacation, made a personal side-trip, or had some other personal activity, you will need to separate your business and personal expenses.  You can deduct your costs in getting to and from your business destination, and your business expenses while you were at the business location.  On the other hand, if a trip is primarily for personal purposes, but you had business expenses while at your destination, you can deduct the business expenses, but not the cost of the trip.

Travel Outside the United States

If you travel outside the U.S., your deductible expenses will depend on whether the trip was entirely for business.  If it was, and you spent all your time in business activities, you can deduct all your travel expenses.   But even though there were certain personal elements involved in your trip, it may still be considered to have been entirely for business if:

• You did not have substantial control over arranging the trip.
• You were outside the United States less than a week, including business and non-business activities.
• You spent less than 25% of the time in non-business activities.
• Vacation was not a major consideration on the trip.

If you qualify for one of these exceptions, you do not have to allocate your travel expenses between business and personal purposes.  You can deduct the total cost of getting to and from your destination.  But if you do not qualify for an exception and your trip includes both business and personal elements, you will need to allocate your travel expenses.

Business Days and Personal Days

If your trip is primarily for business, but also includes personal elements, you must allocate your travel time on a day-to-day basis, between business days and personal days.  You can deduct the business portion of the trip to and from your business destination, based on the percentage of business days outside the U.S. in relation to the total number of days of travel outside the U.S..  The days you depart from and return to the United States are counted as travel days outside the U.S..

In calculating this percentage, business days include:

• Transportation days – days you spend traveling to and from a business destination.  Extra days for personal side-trips or non-business activities do not count as business days.
• Days when your presence is required at a particular place for a specific business purpose.
• Days spent on business, when your principal activity during working hours is your trade or business.
• Certain weekends and holidays, if they fall between business days.  In this case, a weekend or holiday is considered a business day even if you use it for personal activities.

Vacation Included In Trip

You also have to allocate your travel expenses if you take a vacation or have other non-business activities on your way from the U.S. to your business destination, or on the way back to the U.S.  In this case, the part you have to allocate is what a trip would have cost from your departure point in the U.S. to your non-business destination, and your return to the point in the U.S. where your trip outside the U.S. ends.  You prorate this amount according to the percentage of personal days outside the U.S. in relation to the total days outside the U.S.  The result is the amount allocated to personal travel and therefore not deductible.

If you take a side trip for a vacation or other personal activity at, near, or beyond your business destination, you would have to allocate your travel expenses in a slightly different manner.  In this case, you would use the same percentage as above (personal days outside the U.S. divided by total business days outside the U.S.), but you would apply this percentage to the cost of the trip from your departure point in the U.S. to your business destination and back to the U.S.  The resulting amount would be a non-deductible personal expense.

If your trip outside the U.S. is primarily for personal purposes, none of the travel cost is deductible.  If you do any business while on the trip, you may be able to deduct the related business expenses you incur, but not any part of the cost of the trip itself.

Meals

You can deduct the cost of meals if you are traveling away from home and need to stop for sleep or rest (you are traveling overnight, for example), or if the meal is business-related entertainment.  You cannot deduct expenses that are “lavish or extravagant”.  The expenses must be reasonable, but there is no fixed dollar amount established.

50% Limit

You can deduct meal expenses based on actual cost or a standard allowance.  But regardless of the method, you can generally deduct 50% of the un-reimbursed cost of your meals.  If you use actual cost, you need to keep your receipts.

Standard Meal Allowance

Instead of the actual cost, you may be able to claim the standard meal allowance for your meals and incidental expenses (M&IE).  Under this method, you deduct a specified amount, depending on where and when you travel, instead of keeping records of your actual meal expenses.

The standard meal allowance used for tax deduction purposes is the same rate used by the federal government.  Most major cities and many other localities in the United States are designated as high-cost areas and qualify for higher rates.  These rates are available in Publication 1542, Per Diem Rates, available on the IRS website.

If you use the standard allowance rate, you will still need to keep records showing the time, place, and business purpose of your travel.  This standard allowance rate includes incidental expenses such as tips.  So if you use the standard rate for meals, you cannot use the optional rate for incidental expenses ($3 per day) described above.

Also, if you use the standard meal allowance, you will need to prorate the daily rate for your day of departure and the day of your return, if you are traveling away from home.  You can claim ¾ of the daily allowance for each of these two days, or you can use another reasonable method if it is applied consistently.

Transportation Workers

If you are considered a transportation worker; that is your work:

• directly involves moving people or goods by plane, barge, ship, train, bus, or truck, and
• regularly requires you to travel away from home to areas eligible for different standard meal rates,

you can claim a special standard meal allowance rate.  There are two rates, for travel in the U.S. and for travel outside the continental U.S..  These rates are generally established by year, and can be found in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Entertainment

Entertainment for tax purposes can include a variety of different types of activities, including meals as a form of entertainment; entertaining guests at social, athletic or sporting events; hunting or fishing trips; in theaters and nightclubs; and can also include meeting the personal, family, or living needs of individuals, such as by providing meals, hotel rooms, or a rental car to clients and customers or their families.  But you will need to meet the directly-related and associated tests below.

As in the case of meals, entertainment expenses must not be lavish or extravagant, and must be reasonable under the circumstances.  But there is no fixed dollar amount established.

If you are entertaining business and personal guests at the same event, you will have to divide the expenses.  You can divide the total expense on a pro rata basis by person if it is not possible to determine a more precise breakdown.  Expenses for taking turns paying for meals or entertainment among a group of business associates are generally not deductible if no specific business purpose is served.

50% Limit

Generally you can deduct only 50% of your un-reimbursed entertainment expenses.  These expenses must be ordinary and necessary and must meet either one of two tests:

1. Directly-related test
2. Associated test

Directly-related Test

To satisfy the directly-related test, the entertainment must have taken place in a clear business setting, or the main purpose of the entertainment must have been the active conduct of business.  You must have actually engaged in business during the entertainment, and you must have had more than a general expectation of getting income or some other specific business benefit.  But you do not have to show that income or another benefit was actually received.

A clear business setting under the directly-related test may not be satisfied in situations where there are substantial distractions that generally prevent you from actually conducting business.

Associated Test

Even if your entertainment expenses do not meet the directly-related test, they still might meet the associated test, and therefore be deductible.  To satisfy the associated test, the entertainment must be associated with your trade or business, and the entertainment must have directly preceded or followed a substantial business discussion.

An expense will generally be considered as associated if there is a clear business purpose.  This could be to gain new business or to maintain an existing business relationship.  Whether there is a substantial business discussion will depend on the circumstances.  You must be able to show that you actively engaged in a business discussion, but no specific length of time is defined, and you do not necessarily need to discuss business during the entire entertainment meal or activity.

Provided the entertainment activity is on the same day as the business discussion, it is generally considered to directly precede or follow a business discussion.  If they are not on the same day, you will need to consider the circumstances, including place, date and time of the entertainment, possibly also taking into account the travel arrangements of your guests.

Expenses for spouses who attend an entertainment activity are generally not deductible unless the activity would be impractical without the spouses’ presence.  In this case, their expense would also be deductible.

Dues and Memberships in Clubs

Dues and memberships in clubs in which the principal purpose is to provide entertainment activities to members and guests are not deductible.  These include country clubs, golf and athletic clubs, airline clubs, hotel clubs, and clubs that provide meals where business discussions can be held.  But out-of-pocket expenses at such entertainment facilities, that are not for the use of the facility, may be deductible, subject to the 50% limit.

Exception for Charitable Events

The 50% limitation on entertainment expenses does not apply to tickets for charitable sporting events, even if you paid more than the face value of the ticket, if the main purpose of the event is to benefit a charitable organization, all the proceeds go to that organization, and volunteers perform substantially all the work at the event.

Gifts

You can generally deduct all or part of the cost of gifts you give in the course of your trade or business.  There is a $25 limit per year for gifts you gave directly or indirectly to any one person.

Items such as tickets to a theater performance or sporting event, when you do not go with the guest, can be considered either a gift or entertainment.