Guide to Managing Employee Business Expenses in 2019
Managing employee expenses has the power to save your company thousands in taxes -- if you do it right. Deducting office expenses is a no-brainer at tax time, but travel expenses are a little more complicated. In this article, we'll explore why your company should track travel expenses and how to tell if specific expenses are, in fact, tax-deductible.
Let's start from the beginning.
Tracking Travel Expenses
Business travel costs can quickly add up. If you are an administrator or tasked with coordinating travel at your company, you know that the job often involves organizing the trip, making the arrangements, managing the reservations, and assisting during the trip. There may be hotel expenses and meals as well as transportation, parking, tolls, and so on. As an administrator, you often face a few challenges in this:
- How much reimbursement should the employee receive?
- Is the employee spending too much?
- How can you verify the employee's business spending?
- Can you deduct any of these costs?
Travel is a tricky issue because it is not a fixed cost. If one of your employees buys a desk or attends a conference, the amount spent on that is consistent and entirely work-related. The conference costs the same for all participants and the price of desks falls in a fairly narrow range. You could approve spending more on those activities -- upgrading to the VIP option at the conference or choosing a designer desk -- but deducting the full amount of a purchase like that could raise some eyebrows and you know (roughly) where that line is.
However, work travel couldn't be more different.
How Does an Expense Qualify?
The IRS is very clear: "Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. You can't deduct expenses that are lavish or extravagant, or that are for personal purposes." Your employees cannot deduct these expenses even if they are in the city for business purposes.
This means that you cannot deduct the full cost of employee travel expenses when they are beyond what is reasonable for your industry and the purpose of the trip. Let's take a closer look at what travel expenses need to have in order to qualify for deduction.
The first limiting factor is location. When it comes to business expenses, the IRS uses a special classification -- tax home. The location of your "tax home" determines whether a travel expense would be a credible business deduction. For instance, if your employee lives in Connecticut and works in Manhattan, New York City is his or her "tax home." If your employee works late and decides to spend the night in the hotel across the street from your office, that is not a credible business expense.
As an administrator, you need to be aware of this because some of your employees may live in a different place than their tax home (i.e., the location of the office). If one or more of your employees work in different locations, their respective tax homes are wherever they do most of their work. Travel to other locations may qualify.
In addition, the business expense has to be ordinary. In this case, ordinary means that the expense is not uncommon for people in your industry. Other professionals working in your space spend money on the same things, they do so for business purposes, and they do so regularly. This maxim is the first standard to which any business expense is held. Travel is no exception.
To qualify as a business expense, the expenditure must be necessary. This definition is a little more liberal. For example, you could deduct the cost of sending out Christmas cards around the holidays. That is not a necessary expense in the strictest sense of the word, but it can be seen as necessary in the eyes of the IRS because it is something that other companies do to attract new business and retain existing customers. As such, you are allowed to include this.
An example from the world of business travel could be a business lunch.
Surely, your employee could travel to a client's office on the other side of the country to sign a contract or finalize a deal, but the meeting doesn't end there, does it? Of course not. Your employee generally has to have a business lunch (at least). If the employee didn't take your newest client to lunch, your company could lose goodwill, so the expense is deemed necessary.
Business expenses must also be reasonable. Like the designer desk example earlier, you have to have some common sense when it comes to these expenses. An employee spending 10x the average market rate for their hotel room is unreasonable. It is also unreasonable for them to rent a limo to drive two blocks just because it looks good or treating themselves to a $1,000 dinner alone (or otherwise without clients).
Before you approve an employee's business expense, make sure to question whether the amount was reasonable. While your company may opt to offer extra perks to its employees and cover certain luxuries, entering them as a deduction on your taxes is another thing entirely.
There is one final catch with deductible business expenses -- they also have to be of the right duration. If the reason for the business travel is very brief, say to sign a contract, it wouldn't be appropriate to deduct a week's worth of food and lodging. The IRS explains, "You're traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away."
In this case, deducting a hotel and a meal or two makes sense.
One standard to qualify a business trip as warranting an overnight stay is whether that visit is more than 100 miles from the employee's home. In addition, the amounts of the deductions are limited to the federal per diem rate. This is not a requirement for you to use, but it is the standard that the federal government uses for military reserve members and it may give you an idea of how to limit your own company's travel expense allowances.
Similarly, if you relocate an employee to a different branch and that assignment is indefinite, the expenses that the employee incurs are not deductible by your company or them. Travel expenses can only be deducted if they have a definite end date that is expected to last less than one year.
Examples of Deductible Travel Expenses
Deductible travel expenses can take many forms. Some of them are going to be more applicable to some organizations than others. Here is a list of some of the most common examples:
- Airfare (train fare, bus pass, Uber) from the employee's home to the business location (Fun fact: According to Expensify, rideshares are the number one business expense)
- Taxi or ridesharing fares from the employee's home to the airport, train station, bus depot, etc.
- Fees for shipping or transporting employee baggage or company property to business destination
- Automobile expenses incurred during the business trip, such as the miles driven (deducted at the standard mileage rate), tolls, parking, and valet.
- Car rental as required for business trip (but this is only a partial deduction)
- Meals consumed on the business trip
- Lodging for the business trip
- Laundry bills incurred during the trip, including dry cleaning
- Business calls and communications (e.g., calling internationally, sending faxes, using the hotel business center to print)
- Related expenses. This broad category can include the tips you give people in the course of paying for these expenses (e.g., the waiter's tip on your business lunch) as well as transportation to a business function (like that lunch), stenographer fees, and computer rental fees.
When to Allocate
For some companies, the easiest thing to do is use a standard meal allowance and tally up all of the per diems that the government would allow if it were one of their own on a business trip. The IRS even recommends this tactic in Topic 511: "Instead of keeping records of your meal expenses and deducting the actual cost, you can generally use a standard meal allowance, which varies depending on where you travel."
However, business travel expenses are not always cut and dry. Sometimes allocation is necessary. Allocation is when you only deduct a portion of an expense.
This is required when the use of the purchase, the experience, or the cost is not entirely related to business. For example, if you did want to allow your employees to spend up to $300 per night on a hotel room, that's okay -- just don't expect to deduct it on your taxes. Instead, you may want to divide that sum and deduct the portion that is ordinary, necessary, and reasonable from your taxes and then eat the remainder or treat it as a perk under employee compensation or incentives.
Keep Records of Everything
Now that you understand the challenges in tracking travel expenses and know how to determine whether an expense is actually deductible (and by how much), it's time to look at HOW to keep records of everything.
The IRS requires you to keep records for any expenses you deduct. You can keep your expenses in any way that works for your company -- and this is where many businesses go wrong. You have a burden of proof to substantiate any deductions you take.
You can try paper filing systems, but it tends to get messy because there is so much that needs to be recorded, receipts that need kept, and travel particulars that influence how that travel expense should be treated. In the end, it is not uncommon to have receipts vanish or have the numbers on them fade.
Manual systems are also prone to another issue -- human error. Someone writes down an amount, tells you verbally how much they spent, or transposes numbers. People can also make very honest mistakes where math is concerned, but the IRS doesn't care.
Further, don't forget that business travel expenses are not perks of employment. They are credible expenses that have direct bearing on the revenues your company earns and the sales it generates. Do you really want to have all that information tucked "safely" in a box that you pull out in time to do your quarterlies? Plus, paper systems are time wasted. When you have to record everything by hand, individually, it can take hours/days/weeks.
On the other hand, expense reporting software, like Expensify or Zoho Expense, does all the leg work for you automatically. For most companies, an automated solution is clearly a better choice. It saves time and eliminates the risk of human error while giving you almost immediate access to the amounts your company is spending and the returns on investment those expenditures are earning.
Managing Travel Expenses
The key to being effective in managing travel expenses is to find ways that make it easy to track everything. Automated expense tracking software can handle everything for you, and our team at Upside Business Travel isn't stopping there. On top of booking flights, hotels, and rental cars, we also offer tools to make managing business travel expenses effortless for everyone involved. From integration with expense management software like Expensify to app support that makes managing the overall business travel experience easier for you and your employees, Upside is your partner for effective travel booking and expense management.
Are you ready to start managing your business travel expenses more effectively? Visit Upside.com or email us at [email protected] to learn more about how signing up (for free) can equip you with the tools needed to grow and scale your business.