As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists taxpayers with representation in tax examinations, tax audits, appeals, and civil litigation with the Internal Revenue Service and the Ohio Department of Taxation. As part of that representation, our tax attorneys routinely advise sole proprietors regarding when a taxpayer may deduct certain business expenses on Schedule C of their Form 1040 U.S. Individual Income Tax Return. This is the second article of a series that addresses deductible travel expenses for sole proprietors. Specifically, this article provides an overview of the allowable deductions for transportation, lodging, and meal expenses incurred while traveling for business. See our first article, Deductible Business Travel Expenses for Sole Proprietors, for a general overview of deductible business travel expenses. An upcoming article will discuss deductible spouse and family member business travel expenses.
Deductible Transportation Expenses
A sole proprietor may deduct travel expenses on Schedule C of their Form 1040 relating to transportation expenses for a business trip away from home. Treas. Reg. §1.162–2(a). Specific transportation expenses may include airfare, train or bus fare, rental cars, or any similar sort of expense incurred when the sole proprietor or his employee are traveling to a destination for business purposes. We will be following up with a later article detailing the requirements for maintaining a proper mileage log, and proper deductions relating to mileage. When traveling by car, toll and parking fees are deductible. Other deductible transportation expenses include baggage fees, taxi fare, and local transportation costs at the destination. When deducting the travel expenses on Schedule C of the Form 1040, the sole proprietor must substantiate the transportation expenses by keeping adequate records, including receipts and invoices that list details of the cost of each separate transportation expense, the date of the expense, the business destination, the business purposes for the expense, as well as proof of payment. It is very important that a taxpayer has this documentation available during an IRS examination by a Revenue Agent.
Deductible Lodging Expenses
Another type of business travel expense that a sole proprietor may deduct on Schedule C of Form 1040 is for expenses related to lodging. See Internal Revenue Code (“I.R.C.”) §162. Lodging expenses are appropriate when the business trip is overnight or long enough that the sole proprietor or employee must stop to sleep to properly perform his duties. The facts and circumstances of the business trip will dictate whether lodging expenses are too lavish or extravagant. Lodging expenses that are too lavish or extravagant under the circumstances are not deductible. I.R.C. §162. Additionally, lodging expenses may not include expenses that are not a necessary and ordinary business expense. See Treas. Reg. §1.162–2(a). For example, if a sole proprietor or his employee spends seven nights at a hotel, attends a business convention for five days, and then spends the remaining two days as a personal vacation, only five days of the lodging expenses are deductible. To deduct lodging expenses on Schedule C of Form 1040, the sole proprietor must substantiate the expenses by keeping adequate records and documentary evidence, such as receipts and bills, that show details of the cost of each separate lodging expense, the dates of the lodging and number of days spent on business, the business destination, the business purposes for the expense, and proof of payment.
Deductible Meal Expenses
Sole proprietors may also deduct for certain meal expenses on Schedule C of the Form 1040. Meals that a sole proprietor or employee has on a business trip may be deducted in part. Treas. Reg. §1.162–2(a). These meals may include: (i) any meal necessary while on a business trip away from home; (ii) meals for entertaining business clients at a restaurant; and (iii) meals at business conventions, receptions, meetings, or luncheons. A sole proprietor may not, however, deduct for a meal that is considered too lavish or extravagant based upon the circumstances. I.R.C. §162. A meal expense deduction is generally subject to a 50% limit, meaning only half of the cost of the meal is deductible. I.R.C. §274(n). Ultimately, the sole proprietor must substantiate the expenses by keeping adequate records and documentary evidence, such as receipts and invoices that show details of the cost of each separate meal expense, the dates of the trip and number of days spent on business, the business destination, the business purposes for the expense, and proof of payment. Again, it is important for the taxpayer to have this documentation readily available for Revenue Agents as part of an IRS examination.
It is important for sole proprietors to understand what business travel expenses are deductible, and to maintain proper documentation regarding the expenses, to avoid further scrutiny by a Revenue Agent during an IRS examination. If you have been contacted by the IRS or the Ohio Department of Taxation, contact the Nardone Limited tax attorneys at (614) 223-0123.