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Trade show tax tips

March 10, 2011 By    

Trade shows are great for finding new products and making profitable contacts. But you know the downside: With the rising cost of travel, going to a show can get mighty expensive. Plane fares, car rentals, hotel bills and meals – they add up to big money.

What to do? You can reduce a trade show’s impact on your bottom line by deducting all appropriate travel costs as business expenses on your income taxes.

Take care, though: You must deduct only those expenses allowed by law.

“The IRS is always looking for excessive or unsubstantiated deductions when it comes to travel expenses,” cautions Tom Ochsenschlager, a certified public accountant (CPA) and retired vice president of taxation at The American Institute of Certified Public Accountants (AICPA) in Washington, D.C. “It’s the low-hanging fruit for auditors.” Disallowed deductions, of course, will cost you plenty in penalties and interest.

Qualified shows
Before you can deduct any expenses related to attending a trade show, you must first determine if the event qualifies for tax deductibility. How to? Consider the topic of the show and your purpose in attending.

“If a trade show serves a legitimate business purpose, then the related travel expenses are tax deductible,” says Patrick L. Anderson, principal of Anderson Economic Group, a CPA firm in Lansing, Mich.

Many shows, of course, meet this basic criterion. But others are clearly over the line.

“If you are going to a trade show devoted to one of your hobbies, the expenses will be unlikely to qualify,” Anderson says.

But how about those shows that fall into a grey area? These often deal with topics that don’t directly relate to your current operations but may do so in the future as you expand your business interests. In such cases, you must use your best judgment and consult your tax adviser for guidance.

“If a trade show is on a topic that might help the attendee make some money on the side, that person should expect some scrutiny from the IRS,” Anderson says. “Not every person with a 401K, for example, would qualify for deductions for expenses incurred attending an investment seminar.”

Indeed, expenses incurred while attending investment seminars are very often deemed not deductible.

Once you are sure that your trade show qualifies, you can take a wide variety of expenses from airline fares to car rentals to hotels and meals. Here are some fine points to keep in mind when taking deductions.

Meal expenses
You have to eat when you travel, and that usually generates some big restaurant bills. Special rules apply to these expenses.

“You can deduct meals when you are traveling overnight away from home or if the meal is business related,” says Andrew Benedict, tax manager at RGA Advisors in New York City.

However, only 50 percent of the meal cost is deductible. The reasoning is that the other half represents an expense you would have even if you were not on a business trip.

And take it easy on those upscale restaurants. “You cannot deduct meals if the expenses are lavish or extravagant,” Benedict says. “They must be reasonable even though there is no fixed dollar amount established.”

No deduction is allowable for meals unless you substantiate the expense by adequate records or sufficient evidence, Benedict cautions. The following information should be kept:

■ The dollar amount
■ The time and place
■ The business purpose

Per diem rates
Itemizing expenses while traveling can be a chore. You can save yourself some effort by opting for standardized deductions, also called “per diems.” These are available in two categories. The first is lodging. The second is meals and incidental expenses (M&IE).

“If you are taking a lot of employees to the show, using the per diem expense can simplify your recordkeeping,” says Abe Schneier, technical manager at AICPA. “It also helps you control expenses since you can tell your employees what the per diem rate is and ask them to try to limit their budgets to that amount.”

But there’s a downside. “The per diem is often either too high or too low,” Anderson says. “So you end up either over or under reimbursing your employees.” In any case, using the per diem method does not relieve you of the task of maintaining supporting documentation: You still need to keep records showing the time, place and business purpose of your travel.

Per diem rates are revised periodically and are delineated in IRS Publication 1542, “Per Diem Rates (For Travel Within the Continental United States).” For the latest edition, visit the website of the Internal Revenue Service at www.irs.gov and enter “Publication 1542” in the search box.

Traveling spouses
How about spouses or other individuals who are traveling to the trade show but who do not normally have a working relationship with your business?

“Generally you cannot deduct travel expenses of a spouse who does not play a substantial business role,” Anderson says. “This is a common area of abuse and one at which the IRS looks closely.”

And part-time workers who go along? Their expenses are deductible if their presence is needed for your business.

“The regulations are no different for full-time or part-time employees,” Anderson says. “Just remember to go back to the fundamental rule: Expenses are only deductible if the travel serves a business purpose.”

Personal time
Combining pleasure with business is a time-honored custom. But how does that affect how much you can deduct at tax time?

“If you are traveling in the United States and take some vacation time during the trip, the amount that is deductible will be affected,” Benedict says. “If you decide to take a few days for some personal time, you cannot deduct the expenses related to your personal side trip. The expenses to and from the business destination are still deductible, as are the business expenses associated with the trip.”

And what if the trip is personal in nature and you just happen to do some business on the trip?

“The travel to and from the destination are not deductible, but the expenses associated with the business portion of the trip are deductible,” Benedict says.

Careful records
Knowing which travel expenses are deductible is a great help when it comes to income tax time. Your job’s not done, though, when you stuff a handful of hotel and car rental receipts into a storage envelope. You must also properly document your expenses.

“The IRS typically requires contemporaneous records for expenses related to travel, meals and entertainment,” Benedict says. “For each day’s business expense, you need to record the business purpose, the time and the place in some kind of log. Such notation should be made at or close to the time you actually incurred the expense.”

Once you have made your records, store them in a safe place where you can access them easily if the IRS ever questions your travel expenses.

Too often documentation is inadequate or misplaced, Benedict says. In such cases, the business owner is faced with a credibility problem.

“The biggest mistake business owners make is not making an adequate record the same week the expenses were incurred, and then trying to reconstruct the events a year later,” he says.

Illustration by Leo Michael

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