Tax law changed in 2018 because of the Tax Cuts and Job Act, so it’s essential to check in on all of the business expenses you can deduct and those you can’t. While it’s tempting to write off every meal or activity you take part in with a client or colleague, you can no longer do it for everything.
Here is an overview of the current state of entertainment, meal, and travel deductions you need to be aware of come tax time, and how to keep adequate records throughout the year.
Entertainment expenses are, in general, no longer deductible starting in 2018. Activities you once participated in with your clients or colleagues, including attending events like the theater, nightclubs, sporting events, yacht trips, and more, no longer qualify. Club dues and membership fees are also not deductible business expenses.
There are a few exceptions to be aware of:
- Entertainment that is treated as part of an employee’s compensation
- Recreational expenses for employees, including holiday parties or picnics
- A professional association meeting or convention related to the business
These are still deductible business expenses.
For meals to qualify, they must not be lavish or extravagant. They must be reasonable and necessary for business.
Meals offered to the public are 100% deductible, as is the travel to and from client meals. But only 50% of client meals and 50% of business travel meals are deductible. Snacks and beverages in the office are now 50% deductible, an important note since they were 100% deductible before 2018.
Business travel must be a trip when you’re away from home overnight or long enough to need to sleep somewhere. Under tax law, “business days” are those that you spend traveling to and from business destinations and where you must spend the majority of working hours on your business, which is over four hours per day. They are also days where your physical presence is required at another place for a specific business purpose.
You can deduct 50% of business travel meals and 100% of business travel lodging, transportation (cars, planes, trains, and boats), laundry or dry cleaning, and incidental costs related to the trip. These write-offs also apply to your spouse traveling with you, as long as he or she is an employee and traveling for business purposes as well.
International or domestic travel
There are a few things to keep in mind for domestic versus international travel. If you’re traveling less than a week and the trip is more than 50% business-related, you can deduct 100% of the costs. If it’s more than a week and you spend more than 75% on business, you can also deduct 100%. But outside of the U.S., if you travel less than a week and spend 75% or more on business, you can deduct 100%.
Investment property trips
If you travel to look at an investment property, you can amortize the trip’s cost over the first 60 months that you own that investment. If you don’t find a property on that trip, you can deduct the trip’s price as a business expense.
The standard business mileage rate is 57.5 cents per business mile. You have to use the standard rate in the first year if you own your car, but you can choose between standard and actual expense methods after that period. If you lease a vehicle and use the standard rate, you must use it during the entire lease term. You can’t use the standard rate if you ever claimed depreciation for the vehicle.
In addition to the standard rate mentioned above, you can also claim the following:
- Interest expenses multiplied by the business use percentage of the vehicle
- Personal property tax on the vehicle
- Parking fees and toll costs
To use the actual expense method, calculate your actual expenses multiplied by the business use percentage. Actual expenses include:
- Lease payments
- Garage rent
- Personal property tax
- Registration fees
- Parking fees
Keep in mind that even though the standard rate is the easiest option—since all you have to do is track your miles—it’s not always the better choice depending on your circumstances. Run the numbers both ways to see which one is greater at the end of the year.
What’s not deductible:
- Commuting from your home to your W-2 main job
What is deductible:
- Commuting from your home office to your 1099 job
- Commuting from your 1099 job to your home
- Commuting from your W-2 main job to your 1099 job
Put simply, trips from your home to your first business stop and trips from your last business stop to your home are considered personal. Travel between temporary business stops is deductible.
For example: Say you leave your home and make a total of six business stops throughout the day. Then you meet a client for dinner and drive home. The mileage between the first stop and the restaurant is deductible. But the mileage from home to your first business stop, and from the restaurant to home, are considered personal—you cannot deduct them.
Vehicle depreciation deduction
There are four methods for determining the vehicle depreciation deduction:
- Claiming a 179 Expense. This is only available in the year the vehicle is placed in business service. The vehicle must be used for business more than half of the time. If it was bought after 2017, placed in service in 2020, and weighs 6,000 lbs. or less, the first-year deduction limit is $18,100; if the vehicle weighs over 6,000 lbs. it’s $25,500.
- Special/bonus depreciation. This method is available for new vehicles in the first year they are in service, and it must be used at least half of the time for business. The same terms above apply to vehicles that weigh less than 6,000 lbs. But if they are more than this weight, the deduction is unlimited, or 100%.
- 200% or 150%. This method can be used for new or used vehicles if they are utilized at least half of the time for business. This method is employed if the first two options are not chosen.
- Straight-line method. If the others don’t apply, the straight-line method is used. The deduction equals the vehicle’s cost allocated evenly for five years. For leased cars, you can spread advanced payments over the lease period.
Should you buy or lease a business vehicle?
There is no simple answer, but leasing can be a better option to better match your deduction to your cash flow. If you lease, you can deduct lease payments multiplied by your business use percentage (BUP). But if the car’s value is over $50,000, you must add back a specified lease-inclusion amount.
Buying a vehicle for business could give you a bigger deduction upfront, but you may have to recapture some of it if you sell it within five years.
An important thing to note: starting in 2018, if you trade in a business vehicle, you have to report the gain you traded in for a new or used business vehicle.
Make sure you are keeping receipts for all business meals over $75, as well as credit card statements that can back them up. For business travel, keep all receipts for each separate business expense, the dates of travel, and the destination or area, and maintain a record of the business purpose of each trip.
As far as mileage goes, track all business miles carefully. Keep records to back up your numbers. There are a few methods to do this—either tracking every mile for the year, recording miles for a typical 90-day period, tracking them for one week and then multiplying for the year, and others.
Physician Tax Solutions supports busy medical practitioners with proactive strategies and full-service tax preparation services that dramatically reduce tax bills. Contact us online or by calling 1-855-693-7829 to start saving today.