The Deduction Dilemma Determining What Is A Business Expense Can Be A Tricky Proposition

Another tax season has passed, and with it another round of questions from physicians looking for additional tax deductions, including vehicle expenses, meals, entertainment, and travel. While there are some tax advantages to be gained by following the rules, there appears to be some misconception about the magnitude of write-offs, particularly in the case of vehicle expenses.
Transportation and Car Expenses

Accountants generally recommend medical practices not purchase or lease vehicles for doctors unless the doctors keep detailed logs that substantiate that each vehicle is used at least 51{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} for business. Most doctors can’t show this. Therefore, in lieu of tracking actual expenses, we often recommend that doctors submit detailed monthly reports of business miles and get reimbursed from the practice at the IRS allowable rate per mile, which is currently 36.5 cents.

Required documentation includes keeping an account book, diary, log, expense statement, or similar record prepared at the time of the expenditure or vehicle use to show when the auto was used for business. Also required are the total business miles and the total miles driven during the year.

Business mileage does not include commuting from home to the doctor’s main office and back home each day. A log maintained on a weekly basis is considered an adequate record made at or near the time of the expense or vehicle use. Detailed records as to business travel are the keys to full allowance, while inadequate proof or absence of records usually leads to a partial, or even full, disallowance.

Corporate-owned or Corporate-leased Vehicles

A corporation may pay auto expenses for corporate-owned or corporate-leased vehicles which are used personally and deduct these expenses on the corporate books, as long as the employee recognizes income to the extent of the non-business portion of these expenses. Deductible expenses include lease payments, interest, taxes, gasoline, oil, tires, repairs, insurance, depreciation, parking fees and tolls, licenses, and garage rent incurred for cars used in a trade or business.

Business usage is established through odometer readings. The employee recognizes income through what is called a W-2 ‘add-on.’ The employer must calculate the amount to be added to the individual’s W-2 based on a calculation which multiplies the personal use percentage by the annual lease value (as determined by IRS tables) and adding an amount for fuel costs (if the employer pays the fuel charges) by multiplying the number of personal miles by 5.5 cents per mile. This amount is subject to payroll taxes.

Personally Owned Vehicles

Reimbursements to employees for the business portion of vehicle expenses are deductible by the corporation if there is an accountable plan. These reimbursements are not included in the income of the employee. The reimbursements can be for actual expenses paid, or they can be based on the standard mileage rate. The corporation pays the employee an amount equal to the number of business miles multiplied by the standard rate and records this as automobile reimbursement expense.

Business Meals and Entertainment

It is perfectly legitimate for a business to have occasional business lunches (or dinners) with business associates and deduct half the cost, as long as you actually discuss business at the table or the meal directly follows or precedes a substantial and bona fide business discussion. The term ‘business associates’ includes customers, clients, suppliers, employees, agents, partners, and even professional advisors.

However, when the meals are shared too frequently, and when the parties in effect share the expenses (‘you buy lunch today, and I’ll treat tomorrow’), the fact that business is discussed at the table will not turn half the cost of the meals into a deduction.

These expenses are generally deductible at a rate of 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}. The 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} limit applies to food and beverages; taxes and tips; cover charges; concerts and shows; golf, fishing, hunting, or other outings; and sporting and social events. To be deductible, the expenses must be documented and be directly related to or associated with the business. Documentation of business purpose includes recording the person entertained, the amount spent, the time and location, the business relationship, and notes as to the business discussion. Receipts must be retained for all deductions.

Certain items classified as meals and entertainment are excludable from the 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} rule. Included in this category are on-premise meals provided to employees for the convenience of the employer, company dining rooms and cafeterias, and company-paid social or recreational activities that are primarily for the benefit of employees (such as holiday parties and summer outings).

Also included are cab fares, parking, tolls, and auto expenses incurred in the course of the entertainment and memberships and dues for professional organizations such as trade associations and chambers of commerce. Social memberships and country club dues paid on behalf of an employee may not be deducted, unless the employee on whose behalf they were paid recognizes the amount as income, subject to payroll taxes.

Travel

Travel expenses are fully deductible when your business or job requires you to travel away from home. Expenses include air and train tickets, taxi fares, automobile maintenance and operation expenses, hotel bills, charges for telephone calls, and laundry and dry-cleaning costs. No deduction is allowed for travel expenses paid for a spouse, dependent, or other individual accompanying a person on business travel, unless the spouse or other person is an employee of the party paying the expenses, his or her travel has a bona fide business purpose, and the expenses are otherwise deductible. Travel documentation should include destination, people met with, and reason for meeting.

Lisa A. Patenaude, CPA, is a manager with the Health Care Services Division of Meyers Brothers, P.C., in Longmeadow; (413) 567-6101.