I'm sure you have friends, family members, or medical colleagues who are very aggressive with the tax deductions they claim. And every year they tell you about all of the crazy things they deducted last year. And then they usually try to convince you that what they deducted must be okay, since the IRS never disallowed any of their deductions from last year.
$1,110—Average cost of a domestic business trip in 2008.(USA Today, 2008)
I’m sure you have friends, family members, or medical colleagues who are very aggressive with the tax deductions they claim. And every year they tell you about all of the crazy things they deducted last year. And then they usually try to convince you that what they deducted must be okay, since the IRS never disallowed any of their deductions from last year.
The fact that the IRS didn't question their deductions shouldn't be interpreted to mean that what they claimed is allowable. It simply means that the IRS didn't select this person's tax return for audit. Remember, everything is deductible until you get audited.
So what do the rules really say about deducting your professional expenses? To be allowable, an expense must be both “ordinary” and “necessary” in connection with your profession. The IRS has been kind enough to define these terms for us. The IRS defines "ordinary" as common and accepted in a particular trade or business and “necessary” as helpful and appropriate for a particular trade or business.
For example, purchasing a Blackberry or similar device to use for work would qualify as ordinary and necessary, and therefore, be deductible. What if you also purchase a leather carrying case from Coach? Do you think that should qualify? Even though you may view your Coach carrying case as necessary, it most likely doesn't meet the ordinary test. For that reason, the full cost of the Coach carrying case probably isn't deductible to you.
Let's start by discussing which type of travel, meals, and entertainment can be deducted.
Travel within the US
When traveling domestically the trip must be primarily for business to be fully deductible. By meeting this threshold, you get to deduct all of your travel and lodging expenses, as well as 50% of the cost of your meals and entertainment, incurred while away from home. Non-business activities and side trips are never deductible.
What if your travel was primarily for personal reasons? You can still deduct the money spent on travel, lodging, and meals and entertainment incurred in connection with any business related activities. So if you met with a physician colleague to discuss business or had a job interview during your vacation, make sure to deduct that day's hotel and restaurant bills.
Travel Outside the US
The threshold to deduct foreign travel expenses is much higher. To be deductible, your trip must be entirely devoted to your business activities. There are some loopholes to consider, however. If the trip was for a week or less, or you spent at least 75% of the time working, that's good enough in the eyes of the IRS.
And here's another hint to make your foreign travel deductible. When traveling abroad, make sure to work the day after arriving and the day prior to departing. By doing so, your travel days count as business days.
Traveling with Family or FriendsThe money spent on your companion's travel generally isn't deductible. As a matter of fact, you're required to limit the deduction for your hotel room to the single rate charged by the hotel.
To make your companion's travel deductible, that person needs to be an employee of your company. There also must be a business purpose for the companion traveling with you.
Special Rules for Conventions
For conventions in North America, you can deduct travel and lodging expenses, and 50% of the cost of meals and entertainment, incurred while attending a convention that benefits your business or profession. The cost of attending investment, political, and other types of conventions generally isn't deductible.
Did you attend a convention outside of North America? If so, you can only deduct the travel costs incurred if the meeting is directly related to your profession or business. Plus, there must also be a reasonable expectation that a similar meeting could have been held within North America. Who comes up with this stuff?
And believe it or not, there are even rules for conventions held on a cruise ship. You’re allowed to claim a deduction of up to $2,000 annually, as long as the following conditions are all met:
1) The convention is directly related to your profession
2) The ship is a US Flagship
3) All ports of call are located within the US or its possessions
4) You include 2 signed statements with your tax return. One from you, and a second from an officer of the organization, each detailing the time devoted to the business activities
Saturday Night StayIf you extend your trip to stay over a Saturday night to qualify for reduced airfare, the costs associated with that extra day are deductible, even if the business portion of your trip has ended. Evidently, cheaper fares qualify as a legitimate business reason for spending an extra day away from home.
Meals & Entertainment Expenses
When determining whether you can deduct your meals and entertainment, you need to segregate your receipts into two buckets. One bucket is for dinners and events you attend in the general vicinity of where you live. The other is for money spent on meals and entertainment while traveling on business.
Local Meals & EntertainmentI once had a physician-client engaged to another physician, who wanted to deduct every dinner he and his fiancé ate out together since they are both doctors. And you know how many times couples end up going out to dinner while they are courtin’.
Unfortunately, there needs to be a little more of a business purpose when dining locally for the cost of the meal to be deductible.
Here is what the IRS would like to see in connection with local meals and entertainment that you deduct:
1) How much money you spent
2) The time, date and place of the meal or event
3) The specific business purpose of the meeting
4) Who else was with you at the dinner or event
It’s a good idea to jot down this information either on the back of the receipt or in your PDI. And don’t forget that your meals and entertainment are only 50% deductible.
While TravelingWhenever you’re on a business trip, 50% of your meals and business related entertainment is deductible. You have two ways you can calculate your deduction.
One option is to keep track of the actual money spent during your trip. The easiest way to do this is by keeping all the receipts together, or by charging everything on one credit card. At the end of the trip, simply tally up what you spent.
The other option is to base your deduction on the per-diem rates. Here, the IRS has actually made your life easier by assigning one of six rates to every metropolitan area in the country. Currently, the rates range from $39 to $64. A complete listing of the per diem rates by city can be found at www.gsa.gov. To calculate your deduction using the per diem rates, simply multiply the number of days you were in a city by that city’s rate. It couldn’t be easier, and it relieves you of the burden on keeping track of your individual meals and entertainment receipts.
Which method should you choose? For each trip, you get to decide whether you’ll base your meals and entertainment deduction on the per diem rates or actual expenses.
Auto ExpensesWhen you use your car for business, driving between job sites is deductible. So is driving between your home and a temporary job site, job interviews, and conferences. Commuting between your home and a regular place of business generally isn’t tax deductible.
So if you buy a car to get to work, that doesn’t mean the cost of the car, or the money spent to operate the car, can be deducted. Remember, everyone needs to get to work everyday.
If you do have allowable business mileage to claim, there are two ways for you to calculate your automobile expenses. You can either claim $.505 per business mile driven in 2008 (increased by a lousy two cents from 2007), or you can base your deduction on the percentage of miles your car was driven for business multiplied by the actual costs incurred during the year.
Allowable costs include gas, insurance, repairs, parking at home, and either your lease payments, or if you own your car, a factor for depreciation.
Generally, unless you drive your car relatively few miles each year, with most of those miles being allowable business miles, you’re better off basing your deduction on the standard mileage rate.
Uniforms—The cost of purchasing and cleaning clothing, such as lab coats and scrubs, required by your employer that isn’t considered “everyday street clothing” is deductible. Items such as suits, shirts, shoes, ties and wristwatches because they fit the description of “everyday street clothing” aren’t deductible.
Computer Purchases—You can claim depreciation on the business use percent of any computer or peripheral purchased 1) as a requirement of your employment; and 2) for the convenience of your employer are deductible.
Keep Good Records
Whether you maintain your checkbook on Quicken or Microsoft Money, use a separate credit card just for business related expenditures, or diligently file away your receipts in a separate folder, finding a record keeping system that works for you makes it easier to figure out your deductions at tax time
Andrew D. Schwartz, CPA is the founder of The MDTAXES Network, a national network of CPAs who specialize in providing tax services to healthcare professionals. A frequently-quoted tax advisor, his firm of has over 45 years of combined experience specializing in the tax issues affecting health care professionals. For more information call 800-471-0045 or e-mail, email@example.com.