Travel and Entertainment: Maximizing the Tax Benefits

If you’re eligible, you generally can deduct two types of travel expenses related to your business:

1. Local transportation costs. Commuting expenses aren’t deductible, but costs related to trips from your workplace to other locations, such as to visit a client or vendor, are deductible. Examples of such costs include public transportation, taxi, ride share or your own auto, as well as parking and tolls. For those whose main place of business is their personal residence, business trips from the home office and back are considered deductible transportation and not non-deductible commuting.

Please see the special section below for the most effective ways of deducting auto expenses.

2. Away-from-home travel expenses. You can only deduct one-half of the cost of meals (50 percent) in 2024. Lodging expenses incurred while traveling away from home are fully deductible. You also can deduct 100 percent of your transportation expenses as long as business is the primary reason for your trip.

The 100 percent deduction for the cost of business meals and beverages purchased from restaurants in 2021 and 2022 was not extended.

Here are some additional considerations as you assess the deductibility of your local transportation and away-from-home travel expenses:

To be deductible, travel expenses must be “ordinary and necessary,” although “necessary” is liberally defined as “helpful and appropriate,” not “indispensable.” The deduction is also denied for that part of any travel expense that is “lavish or extravagant,” though this rule does not bar deducting the cost of first-class travel or deluxe accommodations or (subject to percentage limitations below) deluxe meals.

What does “away from home” mean? To deduct the costs of lodging and meals (and incidentals, see below) you must generally stay somewhere overnight. In other words, you must be away from your regular place of business longer than an ordinary day’s work and need to sleep or rest to meet the demands of your work while away from home. Otherwise, your costs are considered local transportation costs and the costs of lodging and meals are not deductible.

Where is your “home” for tax purposes? The general view is that your “home” for travel expense purposes is your place of business or your post of duty. It is not where your family lives (some courts have stated that it’s the general area of your residence). Here is an example:

George’s family lives in Boston and George’s business is in Washington, DC. George spends the weekends in Boston and the weekdays in Washington, where he stays in a hotel and eats out. For tax purposes, George’s “home” is in Washington, not Boston, therefore, he cannot deduct any of the following expenses: cost of traveling back and forth between Washington and Boston, cost of eating out in Washington, cost of staying in a hotel in Washington, or any costs incurred traveling between his hotel in Washington and his job in Washington (the latter are considered non-deductible commuting costs).

There are some rules in the tax law concerning where a taxpayer’s “home” is for purposes of deducting travel expenses that are less clear, such as when a taxpayer works at a temporary site or works in two different places.

We’ll cover these rules briefly in these two examples:

Example #1: Joe, who lives in Connecticut and is self-employed, works eight months out of the year in Connecticut (from which he usually earns about $100,000) and four months out of the year in Florida (from which he usually earns about $50,000). Joe’s “tax home” for travel expense purposes is Connecticut. Therefore, the costs of traveling to and from the “lesser” place of employment (Florida), as well as meals and lodging costs incurred while working in Florida, are deductible.

Example #2: Susan is self-employed and works and lives in New York. Occasionally, she must travel to Maryland on temporary assignments, where she spends up to a week at a time. Assuming Susan’s clients don’t reimburse her for travel expenses, she can deduct the costs of meals and lodging while she’s in Maryland, as well as the costs of traveling to and from Maryland. This holds true because her work assignments in Maryland are considered temporary since they will end within a foreseeable time. If an assignment is considered indefinite, that is, expected to last for more than a year, under the tax law, travel, meal, and lodging costs are not deductible.

Here’s a list of some deductible away-from-home travel expenses:

• Meals limited to 50 percent in 2024 and lodging while traveling or once you get to your away-from-home business destination.
• The cost of having your clothes cleaned and pressed away from home.
• The costs of transportation between job sites or to and from hotels and terminals.
• Airfare, bus fare, rail fare, and charges related to shipping baggage or taking it with you.
• The cost of bringing or sending samples or displays, and of renting sample display rooms.
• The costs of keeping and operating a car, including garaging costs.
• The cost of keeping and operating an airplane, including hangar costs.
• Transportation costs between “temporary” job sites and hotels and restaurants.
• Incidentals, including equipment rentals, stenographers’ fees.
• Tips related to the above.

However, many away-from-home travel expenses are not deductible or are restricted in some way. These include:

Travel as a form of education. Trips that are educational in a general way, or improve knowledge of a certain field but are not part of a taxpayer’s job, are not deductible.

Seeking a new location. Travel costs (and other costs) incurred while you are looking for a new place for your business (or for a new business) must be capitalized and cannot be deducted currently.

Luxury water travel: If you travel using an ocean liner, a cruise ship, or some other type of “luxury” water transportation, the amount you can deduct is subject to a per-day limit.

Seeking foreign customers: The costs of traveling abroad to find foreign markets for existing products are not deductible.

Tax law requires you to keep records that will prove the business purpose and amounts of your business travel and meal expenses. To substantiate business travel and business meal expenses, you must prove:

• The amount,
• The time and place of the travel or meal,
• The business purpose, and
• The business relationship of the recipient of business meals.

The most frequent reason for IRS’s disallowance of travel and meal expenses is the failure to show the place and business purpose of an item. Therefore, pay special attention to these aspects of your record-keeping.

Keeping a diary or logbook and recording your business-related activities at or close to the time the expense is incurred is one of the best ways to document your business expenses.

Here’s how these rules apply to your record-keeping for travel expenses and business meals:

Away-from-home travel expenses. You must document the following for each trip:

• The amount of each expense, e.g., the cost of each transportation, lodging and meal. You can group similar types of incidentals together, i.e., “meals, taxis,”
• The dates of your departure and return and the number of days you spent on business.
• Your destination, and
• The business reason for the travel or the business benefit you expect.

Business meal expenses. You must prove the following for each claimed deduction for meal expenses:

• The amount,
• The date of the meal, and
• The name, title, and occupation (showing business relation) of your meal guests.

If you are considering divorce, it is vital to plan for the dissolution of the financial partnership in your marriage. Such dissolution involves dividing financial assets accumulated during the marriage. Further, if children are involved, future financial support for the custodial parent must be planned for. While it may not be at the top of your to-do list, taking time to prepare financially during divorce pays off in the long run.

Take Stock Of Your Situation

Assessing your financial situation helps you in two ways:

• It will provide you with preliminary information for an eventual division of the property.
• It will help you to plan how debts incurred during the marriage are to be paid off. Although the best way to deal with joint debt (such as credit card debt) is to pay it off before the divorce, this strategy is often impossible so compiling a list of your debts will help you to come to some agreement as to how they will be paid off.

To take stock of your situation start by preparing an inventory of your financial assets:

1. • The current balance in all bank accounts;
   • The value of any brokerage accounts;
   • The value of investments, including any IRAs;
   • Your residence(s);
   • Your autos; and
   • Your valuable antiques, jewelry, luxury items, collections, and furnishings.
2. Make sure you have copies of the past two or three years’ tax returns. These will come in handy later.
3. Make sure you know the exact amounts of salary and other income earned by both yourself and your spouse.
4. Find the papers relating to insurance-life, health, auto, and homeowner’s-and pension or other retirement benefits.
5. List all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.

If you are a spouse who has not worked outside the home lately, be sure to open a separate bank account in your own name and apply for a credit card in your own name. These measures will help you to establish credit after the divorce.

Related Guide: For a system that makes it easy to organize and locate your records, please see the Financial Guide: DOCUMENT LOCATOR SYSTEM: A Handy Aid For Keeping Track Of Your Records

Estimate Your Post-Divorce Living Expenses

Figure out how much it will cost you to live after the divorce. This is especially important for the spouse who is planning to remain in the family home with the children; it may be determined that the estimated living expenses are not manageable.

To estimate these expenses, add up all of your monthly debts and living expenses, including rent or mortgage. Then total your after-tax monthly income from all sources. The amount left over is your disposable income.

Related Guide: Please see the Financial Guide: BUDGETING: How To Prepare A Workable Plan

Cancel All Joint Accounts

It is important to cancel all joint accounts immediately once you know you are going to obtain a divorce because creditors have the right to seek payment from either party on a joint credit card or another credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.

Your divorce agreement may specify which one of you pays the bills. However, as far as the creditor is concerned both you and your spouse remain responsible if joint accounts remain open. The creditor will try to collect the bill from whoever it thinks may be able to pay while at the same time reporting the late payments to credit bureaus under both names. Your credit history could be damaged because of the cosigner’s irresponsibility.

Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If this is the case, then try to get the creditor to have the balance transferred to separate accounts.

If Your Spouse’s Poor Credit Affects You

If your spouse’s poor credit hurts your credit record, you may be able to separate yourself from the spouse’s information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own. If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouse’s credit record, not yours.

In practice, it is difficult to prove that the credit history under consideration does not reflect your own, and you may have to be persistent.

For Women: Maintain Your Own Credit Before You Need It

If a woman divorces, and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply even though the account remains open.

Maintaining credit in your own name is the best way to avoid this inconvenience. It also makes it easier to preserve your own, separate, credit history. Further, should you need credit in an emergency it will be available when you need it.

Do not use only your husband’s name (for example, Mrs. John Wilson) for credit purposes.

Check your credit report if you have not done so recently. Make sure the accounts you share are reported in your name as well as your spouse’s name. If not, and you want to use your spouse’s credit history to build your own credit, write to the creditor and request that the account is reported in both names.

Also, carefully review your credit report to determine whether there is any inaccurate or incomplete information. If there is, write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.

Related Guide: Please see the Financial Guide: CREDIT REPORTS: What You Should Know-And Do-About Yours.

If you have been sharing your husband’s accounts, building a credit history in your name should be fairly easy. Call a major credit bureau and request a copy of your report. Contact the issuers of the cards you share with your husband and ask them to report the accounts in your name as well.

If you used the accounts, but never co-signed for them, ask to be added on as jointly liable for some of the major credit cards. Once you have several accounts listed as references on your credit record, apply for a department store card, or even a Visa or MasterCard, in your own name.

If you held accounts jointly and they were opened before 1977 (in which case they may have been reported only in your husband’s name), point them out and tell the creditor to consider them as your credit history also. The creditor cannot require your spouse’s or former spouse’s signature to access his credit file if you are using his information to qualify for credit.

If you do not have a credit history, a secured credit card is a fairly quick and easy way to get a major credit card. Secured credit cards look and are used like regular Visa or MasterCard’s, but they require a savings or money market deposit of several hundred dollars that the lender holds in case you default. In most cases, the creditor will report your payment record on these accounts just like a regular bank card, allowing you to build a good credit record if you pay your bills promptly.

Consider the Legal Issues

The best way to plan for the legal issues involved in a divorce including child custody, division of property, and alimony or support payments is to come to an agreement with your spouse. If you can reach an agreement, the time and money you will have to expend in coming up with a legal solution–either one worked out between the two attorneys or one worked out by a court–will be drastically reduced.

Here are some general tips for handling the legal aspects of a divorce:

• Get your own attorney if there are significant issues to deal with such as child custody, alimony, or significant assets.
• The best way to find a good matrimonial attorney is to ask for referrals or contact the American Academy of Matrimonial Lawyers (see the last section of this guide for contact information).
• Make sure the divorce decree or agreement covers all types of insurance coverage including life, health, and auto.
• Be sure to change the beneficiaries on life insurance policies, IRA accounts, 401(k) plans, other retirement accounts, and pension plans.
• Don’t forget to update your will.

Those who have trouble arriving at an equitable agreement–and who do not require the services of an attorney–might consider the use of a divorce mediator. Ask friends, relatives, and other professionals for recommendations or contact the Association for Conflict Resolution (see the last section of this guide for contact information). You can also look in the phone book or classifieds under “Divorce Assistance” or “Lawyer Alternatives.”

Division of Property

The laws governing the division of property between ex-spouses vary from state to state. Further, matrimonial judges have a great deal of latitude in applying those laws.

Here is a list of items you should be sure to take care of, regardless of whether you are represented by an attorney.

1. Understand how your state’s laws on property division work.
2. If you owned property separately during the marriage, be sure you have the papers to prove that it has been kept separate.
3. Be ready to document any non-financial contributions to the marriage such as support of a spouse while he or she attended school or non-financial contributions to his or her financial success.
4. If you need alimony or child support, be ready to document your need for it.
5. If you have not worked outside the home during the marriage, consider having the divorce decree provide for money for you to be trained or educated.

Employees who are “fully reimbursed” by their employer for travel or business meal expenses must:

• Adequately account to their employer by means of an expense account statement, and
• Return any excess reimbursement.

As long as you are covered by (and follow) an “accountable plan,” and your reimbursements don’t exceed your expenses, you won’t have to report the reimbursements as gross income. Some per diem arrangements (by which you receive a flat amount per day) and mileage allowances can avoid detailed expense accounting to the employer, but proof of time, place, and business purpose is still required.

However, if your employer’s reimbursement plan is not “accountable,” you must report the reimbursements as income. Prior to 2018, you could deduct these expenses on your tax return as miscellaneous itemized deductions on Form 1040 Schedule A, subject to the two percent-of-adjusted-gross-income floor. As noted earlier, however, the TCJA eliminated miscellaneous deductions for tax years 2018 through 2025.

If you’re eligible, you have two choices as to how to claim the deduction for business auto expenses:

1. You can deduct the actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, chauffeur salaries, and depreciation, or
2. You can use the standard mileage deduction, which is an inflation-adjusted amount that is multiplied by the number of business miles driven.

Parking fees and tolls may be deducted no matter which method you use.

The standard mileage rate produces a larger deduction for some business owners, while others fare better (tax-wise) by deducting actual expenses. Figuring your deduction using both methods tells you which method is better for you tax-wise. Here are some additional considerations:

Expensing and depreciating vehicle costs. Deduction options and amounts depend on the percentage used for business. Also, if the car is used more than 50 percent for business, it can be included as business property and qualify for Section 179 expensing in the year of purchase. The deduction is reduced proportionately to the extent the car is used for personal purposes. If you take this deduction, you can’t use the actual mileage for that vehicle in any year.

Depreciation. Assuming the car cost more than the Section 179 limit, or Section 179 is not available or is not claimed, depreciation is allowed. Several depreciation options are available, but there are limits to the amount of depreciation that can be claimed per year. Depreciation otherwise allowable is reduced by the proportion of personal use. For example, a car used 20 percent for personal use is depreciated at 80 percent of the amount otherwise allowed.

Accelerated depreciation is defined as depreciation that is at a rate higher than normal that results from dividing the vehicle’s cost by the number of years it will be used. It is not allowed where personal use is 50 percent or more. If you claimed accelerated depreciation in a prior year and your business use then falls to 50 percent or less, you become subject to “recapture” of the excess depreciation (i.e., it’s included in income). Of course, using the standard mileage deduction described below allows you to avoid these limits.

Determining whether to use the standard mileage deduction. If you opt for the standard mileage rate, you simply multiply the applicable cents-per-mile rate by the number of business miles you drove. Be aware, however, that the standard mileage deduction may understate your costs. This is especially true for taxpayers who use the car 100 percent for business, or close to that percentage.

Once you choose the standard mileage rate, you cannot use accelerated depreciation even if you opt for the actual cost method in a later year. You may use only straight line.

The standard mileage method usually benefits taxpayers who have less expensive cars or who travel a large number of business miles. To determine which method is better for you, make the calculations each way during the first year you use the car for business.

You may use the standard mileage for leased cars if you use it for the entire lease period. Or, you can deduct actual expenses instead, including leasing costs.

Recordkeeping. Tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. Not only is keeping good records essential in case of an audit, but it also allows you to make the most of your auto deductions. For example, you won’t be able to determine which of the two options is better if you don’t know the number of miles driven and the total amount you spent on the car. If you use the actual cost method, you’ll have to keep receipts as well. For many business owners, using a separate credit card for business simplifies your record-keeping.

Don’t forget to deduct the interest you pay to finance a business-use car if you’re self-employed.