VITA: 01/17/09 Lesson 22: Business Travel Expense

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

2. 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

3. 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

4. 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

5. 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

6. Lesson 22: Business Travel Expenses • Alternative Ways of Figuring some expenses (other than actual) • Vehicle Expense can be reported using the actual expense method OR the standard mileage rate • 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

7. 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 • Taxpayers can report actual expenses and then reduce them by the applicable percentage • 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

8. 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

9. 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