My personal insight after two audits is that the I.R.S. does not reveal their hand . . .ever! You are asked to bring tons of documentation, but really you don't know why. They then ask lots of questions, all presuming you are guilty until you prove otherwise.
After surviving my I.R.S. audit (with "no changes") I think they wanted documentation about my travel expenses to see if I mixed my business travel with leisure travel. They did not debate the amount but seemed to want to be sure that my deductions for Travel, Meals and Entertainment expenses were for BUSINESS ONLY. Fortunately (or unfortunately), I never seem to have time to add any leisure to my business trips.
I had receipts for all my Travel, Meals and Entertainment business expenses and adequate documentation. My trips were all 100% business. Thank goodness. It immediately curtailed this line of interrogation.
What concerns me is that so many artists or makers do mix business travel with leisure. They go to conferences or exhibition openings and then add on a few days of traveling around the area for leisure/vacation/entertainment.
There a two ways you can look at this.
- Think like an artist/maker, or
- Think like the I.R.S.
Thinking like an artist, maybe you don't care about deducting the travel as a business expense or think .... "Wow, the Conference is in a city you have always wanted to visit!" Your spending money to get to the city, why not stay for extra days. You already have to spend the money on the travel and hotel. Maybe you want to take advantage of the fact that you are already there. Have fun!
WARNING: Be very careful about deducting your business travel expenses. The I.R.S. looks very carefully at combined business and leisure travel, especially when you aren't making very much money from your business.
THINK LIKE THE I.R.S. To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. Generally, you also must show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your trade or business. For more information on travel, meals, and entertainment, including deductibility, see Publication 463.
Count weekends, holidays, and other necessary standby days as business days if they fall between business days. But if they follow your business meetings or activity and you remain at your business destination for non-business or personal reasons, do not count them as business days.
Make Sure that Your Trip is Primarily for Business
You can deduct all of your travel expenses if your trip was entirely business related. If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct your business-related travel expenses. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination.
You work in Atlanta and take a business trip to New Orleans. On your way home, you stop in Mobile to visit your parents. You spend $2,012 for the 9 days you are away from home for travel, meals, lodging, and other travel expenses. If you had not stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $1,712. You can deduct $1,712 for your trip, including the cost of round-trip transportation to and from New Orleans.
What Does the IRS Consider a Business Day?
Any of these qualify as a business day:
- a day on which you travel getting to and from your business destination
- a day when you spend at least 4 hours on business related activities
- a day when you have a pre-scheduled appointment
The first two are relatively simple to understand. Just be sure you have documentation to back up your travel, such as ticket stubs. On days when you are spending at least 4 hours on business activities, your activity log serves as documentation. (This is where your travel log or diary will help document your trip.)
On days when you have a pre-scheduled appointment, you have to be able to prove that you actually attended the appointment. How do you prove it? If you met someone for a meal and picked up the tab, the receipt from the meal serves as proof. Otherwise, you'll need to print out emails from before and after the trip to the person or people you met. The email from before your trips proves that the meeting was pre-scheduled. The email sent after the meeting (for instance, thanking them for meeting you) proves that you were at the meeting.
Use your travel diary to help you with this record keeping.
Business Meals You can deduct the cost of meals if it is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business. Half the cost of all your meals during actual business days can be deducted. This is true whether you met another person for a meal and picked up the tab, or you ate alone. The I.R.S. has lots of rules about business meals including a standard meal allowance. Read more about this on their web site.
Was Your Trip Primarily for Personal Reasons
If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. However, you can deduct any expenses you have while at your destination that are directly related to your business.
P.S. The rules for traveling outside the United States are different. If you want to know how to account for your business travel outside of the U.S. read the I.R.S. web site.
It really irks me that big companies routinely take their executives on fancy trips for days of golfing with a couple of meetings thrown in and then deduct the entire amount as a business expense while artists can never do this. But for most of us, complaining about another industries indulgent business expenses isn't going to sway your own personal auditor at the I.R.S.
So keep your business expenses legitimate and above board. Avoid combining business with leisure travel, unless you don't plan on taking the business deduction.
Much of the information in this post (with the exception of my opinion) came directly from the I.R.S. web site. Read the I.R.S. web site for more information.