VITA: Winter 2011
Lesson 22: Business Travel Expense
Winter 2011
Kristina Shroyer
© Kristina Shroyer 2011
Lesson 22: Business Travel Expenses
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Blank Forms for this Lesson
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As we go through this lesson you'll want to use
some of the blank forms in Publication 4491-W for
reference (blank forms start on Page 229)
Form 1040 (page 229)
Schedule A (page 254)
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We're looking in particular at Line 21
Form 2106 EZ – page 234
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You also probably want to download page 2106
when you get home from the IRS website
© Kristina Shroyer 2011
Lesson 22: Business Travel Expenses
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Introduction
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We just discussed itemized deductions
Look at line 21 of the Miscellaneous Deductions Subject to 2% part of the Schedule A
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It is titled "Unreimbursed Employee Expenses"
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Also note line 21 says "Attach form 2106 if Required"
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We'll discuss what form 2106 is, when it is required 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
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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
We need to figure out which unreimbursed business travel expenses can be deducted and
how those need to be reported
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
By necessary we mean an expense that is helpful and appropriate for a taxpayers
business
This lesson will also give you a better idea of what expenses are and are
deductible and non-deductible on Schedule C-EZ/Sch C as well as how to
properly compute vehicle expenses for Schedule C-EZ
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IMPORTANT: Note the distinction – a self employed taxpayer uses schedule C-EZ
An EMPLOYEE (W-2) deducts Unreimbursed Employee expenses on Schedule A
© Kristina Shroyer 2011
Lesson 22: Business Travel Expenses
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What qualifies as a deductible business travel expense?
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Deductible travel expenses are any expenses that are ordinary (typical for the
profession) and necessary (helpful and appropriate for business) for the taxpayer's
job
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Deductible travel expenses can NOT include any personal expenses
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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
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let's look at them
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Regarding Meals and Entertainment
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Regarding transportation
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Lodging and overnight travel away from the taxpayer's tax home is deductible
commuting to and from work is NOT deductible
traveling to a clients 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 – it is the entire city or general area where the taxpayer's main place of
business or work is located
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(if deductible as an ordinary and necessary expense) these expenses is generally only 50% deductible
If a taxpayer generally works in more than one place the tax home is the general area where the main
place of business or work is located
Expenses for travel away from one's tax home for a period of temporary employment are deductible but
only for one year or less
Let's read the example at the top of page 22-2
© Kristina Shroyer 2011
Lesson 22: Business Travel Expenses
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What is eligible for home leave?
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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:
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Taxpayers eligible for this will deduct their expenses in the same way employees
deducting business expenses away from home do
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amounts paid for travel, meals, and lodging while on home leave as an employee
business expense
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 second example on page 22-2
Employer Reimbursements: Are reimbursements reported?
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Yes any travel expenses that are deductable should be offset by reimbursements
received.
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The amount the deductable travel expenses exceed reimbursements by will be the
deduction
Any excess reimbursements will be taxable income
Read last Example Page 22-2
© Kristina Shroyer 2011
Lesson 22: Business Travel Expenses
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What records must the taxpayer have?
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It is essential that the taxpayer keep records of their
business travel expenses
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The records must document:
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This includes records for meals (unless standard meal
allowance is used), entertainment, gifts, or the use of an
automobile or other property like a cell phone
time of expense
place of expense
amount of expense
business purpose of expense
business relationship (for entertainment and gifts)
General rule
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taxpayer needs receipts for all lodging expenses (no matter
what the amount) and for any other expenses in excess of $75
© Kristina Shroyer 2011
Lesson 22: Business Travel Expenses
Alternative Ways of Figuring some expenses (other than actual)
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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
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Vehicle Expenses
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Vehicle expenses: expenses incurred when taxpayers use their vehicles for business purposes
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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 or Form 2106-EZ and
report information on the vehicle Part II
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so Form 2106 or 2106-EZ is REQUIRED if the taxpayer has vehicle expenses they want to report on line 21 of
Sch A
Two methods for figuring Vehicle Expenses
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Actual Expense Method
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This is out of the VITA scope according to the book – see Tip on page 22-3
Standard Mileage Method
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This method multiplies the number of miles the taxpayer drove for business by a standard rate per mile
The 2010 standard mileage rate is 50 cents per mile
Taxpayers can only use this method is they meet ONE of the requirements below (shown on page 22-3)
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They must have owned the vehicle and used the standard mileage method in the first year the vehicle was placed
in service
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OR They must have leased the vehicle and use the standard mileage method for the life of the lease
So handle the vehicle expenses in this manner:
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first determine if the taxpayer can use standard mileage method
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If they can only use actual expenses refer them to a professional tax preparer
and then determine the standard mileage method deduction they can take (50 cents * business miles)
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Remember from the Schedule C EZ chapter they MUST document their total miles driven for the year and
LOG their business miles driven
© Kristina Shroyer 2011
Lesson 22: Business Travel Expenses
Vehicle Expenses (continued)
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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 or Form 2106
EZ
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Let's Look at it
The back up records required for vehicle expenses is the
same as the other business expenses we discussed
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Business Miles Must be logged
Total miles should be recorded and documented
© Kristina Shroyer 2011
Lesson 22: Business Travel Expenses
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Meals and Incidental Expenses
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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)
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and by a rate of 80% for certain taxpayers subject to the Department of Transportation's service hours
you will almost always use 50%
To see if the taxpayer is subject to the DOT rules of service (80%) see the instructions of Form 2106
page 4
So first meals and entertainment have to meet the deductibility requirements and the taxpayer has
to meet the records requirement – then the deductible amount is multiplied by 50% or 80%
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Meals and Incidental Expenses can be reported in one of two ways
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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
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2.
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The taxpayer can use a standard amount for meals OR incidental expenses
The standard amount for incidental expenses is $3 per day
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The standard amount for meals and entertainment is at http://www.gsa.gov/perdiem for expenses within the
united states and http://aoprals.state.gov/content.asp?content_id=184&menu_id=78 for amounts outside
the United States
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You can use this method ONLY if you didn't use the standard meals & entertainment allowance – cannot use
both, so you only want to use this if you had no meals expenses on a day
Note it's based on where the taxpayer traveled TO
Publication 463 (find at IRS website) has more details on using the standard amount which you can
read (page 5-6)
There is also info in the Form 2106 Instructions page 3
Records are required as specified earlier (slide 6) no matter what method is used
Exercises page 22-4
© Kristina Shroyer 2011
Lesson 22: Business Travel Expenses
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Reporting Business Travel Expense
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Reported on Form 2106 or Form 2106-EZ
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The result is reported on Schedule A as a Miscellaneous Itemized Deduction Subject to
2%
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Determine if the taxpayer is eligible to file From 2106-EZ
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Requirements are at the top of Form 2016 EZ…summarized below:
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Look at line 21 of Schedule A
Must the standard mileage rate if claiming vehicle expenses AND
Were not reimbursed by an employer for any expenses
Determine if a taxpayer must file a Form 2106
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Look at the Form 2106 Instructions (download from IRS website – I did, let's look)
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See the flowchart on who must file a Form 2106
Flowchart is on Page 1 (let's look at the questions)
Generally in most cases if the taxpayer has job related vehicle expenses, job related
meals and entertainment expenses, job related travel expenses and/or partial
reimbursements from their employer they must file the Form 2106.
© Kristina Shroyer 2011
Lesson 22: Business Travel Expenses
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Form 2106 (the EZ is on page 201 of your Publication 4491-W)
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Part I - Calculates total Travel Expenses (has three steps – See below)
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Column A – for all travel expenses except meals and entertainment
Column B – for meals and entertainment expense (do NOT multiply by 50% - this is done
in step 3 of the process)
Part II – Calculates Vehicle Expenses
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Section A – General Information about vehicle
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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)
Note Part II has to be done first to get the Vehicle Expenses to put in Part I
Three Steps to the 2106 in Part I
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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
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The placed in service date is the date the vehicle began being used for business
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
© Kristina Shroyer 2011