VITA: 01/17/09 Lesson 22: Business Travel Expense Winter 2008 Kristina Shroyer

Lesson 22: Business Travel Expenses Introduction We just discussed itemized deductions Look at line 21 of the Miscellaneous Deductions Subject to 2% part of the Schedule A ♦ It is titled "Unreimbursed Employee Expenses"  We talked in the Schedule A lesson about some of these unreimbursed employee expenses such as union dues  This idea of Unreimbursed Employee Expenses can get more complicated and does have additional rules associated with it  In this lesson we're going to talk about deductible business travel expenses, how they're reported on a return and what can be deducted ♦ Also note line 21 says "Attach form 2106 if Required"  We'll discuss what form 2106 is and how to use it In this lesson we'll talk about deducting ordinary and necessary business travel expenses a taxpayer may have both in general and in regard to Schedule A ♦ Some business travel expenses: entertainment, gifts, transportation…etc. ♦ By ordinary we just mean an expense that is common and accepted in the taxpayer's field or profession

Lesson 22: Business Travel Expenses What qualifies as a deductible business travel expense? Deductible travel expenses are any expenses that are ordinary (typical for the profession) and necessary for the taxpayer's job Deductible travel expenses can NOT include any personal expenses ♦ This means NO expenses for the taxpayer's family are deductible ♦ Only expenses incurred while conducting business are deductible See page 22-1 from some examples of deductible business travel expenses ♦ let's look at them  Meals and Entertainment (if deductible) is generally only 50% deductible ♦ Regarding transportation  Lodging and overnight travel away from the taxpayer's tax home is deductible  commuting to and from work is NOT deductible  traveling to a client's is deductible A taxpayer's tax home is their main place of business – it does not matter where the taxpayer lives or their family resides ♦ Expenses for travel away from one's tax home for a period of temporary employment are deductible but only for one year

Lesson 22: Business Travel Expenses What is eligible for home leave? Home leave is when a United states Foreign Service employee is basically ordered to take a 18 month leave of absence after completion of a certain amount of service Since the home leave is ordered and required by law, members of the foreign service on home leave are allowed to deduct: ♦ amounts paid for travel, meals, and lodging while on home leave as an employee business expense Taxpayers eligible for this will deduct their expenses in the same way employees deducting business expenses away from home do ♦ On Form 2106 ♦ Just as with regular business expenses, any amounts paid on behalf of the taxpayer's family are NOT deductible Look at the example on page 22-2 Are reimbursements reported? Yes any travel expenses that are deductable should be offset by reimbursements received. ♦ The amount the deductable travel expenses exceed reimbursements by will be the deduction ♦ Any excess reimbursements will be taxable income

Lesson 22: Business Travel Expenses What records must the taxpayer have? It is essential that the taxpayer keep records of their business travel expenses ♦ This include records for meals (unless standard meal allowance is used), entertainment, gifts, or the use of an automobile or other property like a cell phone The records must document: ♦ time of expense ♦ place of expense ♦ amount of expense ♦ business purpose of expense ♦ business relationship (for entertainment and gifts) General rule ♦ taxpayer needs receipts for all lodging expenses and for any other expenses in excess of $75

Lesson 22: Business Travel Expenses Alternative Ways of Figuring some expenses (other than actual) 1. Vehicle Expense can be reported using the actual expense method OR the standard mileage rate 2. Meals and incidental expenses can be reported by using the actual amounts or a standard amount can be used Vehicle Expenses vehicle expenses: expenses incurred when taxpayers use their vehicles for business purposes ♦ Remember we already said commuting expenses are not deductible ♦ If a taxpayer has qualified vehicle expenses you'll have to fill out a form 2106 and report them in Part II Two methods for figuring Vehicle Expenses ♦ Actual Expense Method  This is out of the VITA scope – bases the deduction on a variety of expenses and allocates them out according to business use ♦ Standard Mileage Method  This method multiplies the number of miles the taxpayer drove for business by a standard rate per mile  The 2008 mileage rate(s) are shown in the table on page 22-3  Taxpayers can only use this method is they meet ONE of the requirements shown o page 22-3 (let's read them)  So first determine if the taxpayer can use this method and then determine the deduction

Lesson 22: Business Travel Expenses Vehicle Expenses (continued) If a taxpayer reports vehicle expenses (no matter which method is used), they must complete the General Information section in Part II of Form 2106 ♦ Let's Look at it The back up records required is the same as the other business expenses we discussed Meals and Incidental Expenses Meals and Entertainment expenses are always figured separately from the other business travel expenses ♦ They are multiplied by a rate of 50% for must taxpayers (so only ½ deductible)  and by a rate of 80% for certain taxpayers subject to the Department of Transportation's service hours  you will almost always use 50%, see the tip Meals and Incidental Expenses can be reported in two ways 1. Taxpayers can report actual expenses and then reduce them by the applicable percentage 2. Taxpayers may report a standard amount to claim meals and entertainment or incidental expenses Records are required as specified earlier no matter what method is used Exercises page 22-4

Lesson 22: Business Travel Expenses Reporting Business Travel Expense Reported on Form 2106 of Form 2106-EZ ♦ The result is reported on Schedule A as a Miscellaneous Itemized Deduction Subject to 2%  Look at line 21 of Schedule A First determine if a taxpayer must file a Form 2106 Look at the Form 2106 Instructions (download from IRS website – I did, let's look) Questions are on Page 1 (let's go through them) Next determine if the taxpayer is eligible to file From 2106-EZ Requirements are on page 22-5 (let's read them) The requirements are also at the top of the Form 2106-EZ

Lesson 22: Business Travel Expenses Form 2106 (the EZ is on page 201 of your Publication 4491-W) Part I - Calculates total Travel Expenses ♦ Column A – lists all travel expenses except meals and entertainment ♦ Column B – lists meals and entertainment expense (do NOT multiply by 50% - this is done in step 3 of the process) Part 2 – Calculates Vehicle Expenses ♦ Section A – General Information about vehicle  The placed in service date is the date the vehicle began being used for business ♦ Section B – for taxpayers who use the standard mileage rate (for VITA all taxpayers will use this for vehicles or be out of scope) ♦ Section C and D – out of scope (for actual expense method) Three Steps to the 2106 Step 1: Complete for all taxpayers required to use the 2106 Step 2: Complete only if the employer reimbursed the taxpayer and the reimbursement is not included in the Employee's W-2 Step 3: Figure the expenses to deduct on Schedule A ♦ Subtract the reimbursement from the expenses ♦ Calculate meals and entertainment expense (50% or 80% multiplication) ♦ Determine the total deduction to be entered on Schedule A Let's look at the 2106 EZ also