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T&E Expenses: Toe the Line on Recordkeeping

Traditionally, the IRS takes an extra-long look at taxpayer deductions for travel and entertainment (T&E) expenses. Therefore, it is important to keep meticulous records of your expenditures. Although certain shortcuts may be allowed, here are the general rules to follow in this area.

Business Travel Expenses

If you travel away from home on business, you can deduct your transportation costs (e.g., airfare), meals, lodging and related incidental expenses such as cab fare and tips. The deduction for meals is limited to 50% of the cost while other travel expenses are fully deductible. However, you must keep records of your business travel expenses within a diary or by some other means of documentation.

The records for business travel must show:

*Time: The dates you left and returned and the number of days away on business;

*Place: The destination of the business travel;

*Business purpose: The reason for making the business trip; and

*Amount: The cost of each travel expense.

You must also keep receipts of all lodging expenses and other business-related expenses of $75 or more.

Note: If you use the actual expense method for driving a business car, you can deduct normal operating expenses-gasoline, oil, insurance, repairs, etc.-that are attributable to your business use plus an approved depreciation or leasing allowance. The allowance is strictly limited for so-called "luxury cars," but it may be bothersome to keep all the required records for these business car expenses.

Alternatively, you may deduct the standard mileage rate by simply multiplying a government-approved flat rate by your total business miles and add the cost of any parking fees and tolls. The rate for the first eight months of 2005 is 40.5 cents per business mile; it is 48.5 cents per business mile for the last four months of the year.

If you begin using the actual expense method for a car, you generally cannot switch to the standard mileage rate in a subsequent year. However, you can do it the other way around-start using the standard mileage rate and switch to the actual expense method if it produces a larger deduction.

Note: Even if you use the standard mileage rate, you still must keep track of the date, place, mileage and business purpose of your trips.

Business Entertainment Expenses

Generally speaking, you can deduct qualified entertainment expenses that are either directly related to your business or associated with your business. The deduction is equal to 50% of the cost.

1. Entertainment is considered directly related to your business if you actually discuss business during the entertainment and you have more than a general expectation of deriving a business benefit from the meeting. In other words, the entertainment cannot be just for goodwill. Furthermore, the entertainment must take place in an atmosphere conducive to discussing business.

2. Entertainment is considered associated with your business if it precedes or follows a substantial business discussion. It is not necessary to discuss business matters during the entertainment. If the client is from out of town, the business discussion can take place the day before or the day after the entertainment.

As with business travel, you must keep detailed records of your entertainment expenses with receipts or credit card statements of $75 or more. Generally, it is advisable to use a diary or log. The records for business entertainment must show:

*The date, location and nature of the entertainment;

*The amount spent on the entertainment;

*The business reason for the entertainment or the benefit you expect to derive;

*The person or people entertained and their business relationship to you;

*The details of the substantial business discussion (e.g., date, duration and nature of the meeting) for any associated-with entertainment.

In summary: There's no reason why you cannot deduct all legitimate T&E expenses on your tax return. Just make sure you have the records to back up your claims.

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