Traveling for business has a lot of perks. It may mean spending some time away from the office and dealing with a lot of tasks as a result, but for the most part, it can be very rewarding.
You do not have to be a boss to understand how rewarding business trips can be. Business owners and executives, for one, can meet prospective clients and suppliers. They can seal deals by wining and dining their associates. Or they can strengthen their relationships with current partners.
Employees, meanwhile, can improve on their skills, update their knowledge, and network with peers when they attend conventions and business conferences. Plus, the time away from the office can re-energize them and make them more productive and inspired when they return to their respective work stations.
Claiming tax deductions
What’s more encouraging is that most business-related expenses can be claimed as tax deductible. Anything related to the business trip can be written off, from airfare, taxi fare, lodging, communication charges, and supplies.
Even incidental expenses can be claimed as tax deductible. These are small costs incurred during a business travel. It may cover for tips or fees that an employee or business owner gives to porters, baggage carrier, maids, and stewards.
In short, incidental expenses are gratuities given to staff of restaurants, hotels, cruise ships, and similar establishments.
Tipping is a customary practice in the United States. It should be noted that the federal minimum wage of $8 an hour, so tips can help make up for the low pay of servers.
Thus, business travelers will normally have to spend for gratuities extended to waiters, bell boys, porters, and other servers that they will encounter during their trip.
While there’s no standard rate as far as tips in the US are concerned, the following is a guide on how much business travelers tip for people who serve them:
- Taxi/limousine driver—at least 15 percent of the total fare
- Porter- $1 per bag
- Valet parking attendant– $1-2 for every car retrieved
- Restaurant waiter/waitress- at least 15 percent of the total bill less tax
- Bell staff- $1 for every bag delivered to a room
- Buffet service– $1 to $2
- Bartender/cocktail—at least 10 percent of the total bill
Tipping, however, is not practiced in other countries. In fact, outside the United States, the practice is not customary.
For instance, tipping in Australia is practically non-existent. This can be attributed to the fact that the minimum wage in Australia is $16 per hour, or around $622 a week.
It’s also not a practice in other countries such as Japan, Argentina, and Estonia. In most countries in Europe, such as France, United Kingdom, the Netherlands and Finland, tips are already included in the bill.
What’s Not Included in Incidental Expenses?
The IRS, however, does not consider the following as incidental expenses:
- Costs incurred in cleaning and pressing of clothes
- Long distance telephone calls
- Local calls
- Internet connection
- Fax services
- Gas for rental vehicles
- Parking fees
These costs incurred, after all, are reimbursable as other expenses. For example, costs of cleaning and ironing of clothes can be written off as cleaning expenses. Local and long distance calls, as well as fax and Internet services, may be claimed as communication expenses. Gas for rental vehicles and parking fees, meanwhile, are considered as transportation expenses.
Because incidental expenses are small, it is very common for business owners and employees usually pay out in cash. The minimal amounts involved in a tip, and the fact that there’s no need to issue a receipt for such expense, has prompted the IRS to set a rule when it comes to claiming incidental expenses during a business trip.
According to the IRS, a business owner or employee who was on a business travel can opt for the incidental-expenses only method in claiming a deduction. In this method, the taxpayer can write off incidental expense of $5 a day.
This method spares taxpayers from the hassle of keeping tabs of the costs they incurred for the tips given during the course of a business trip. Since tips are very small, it can be difficult for business travelers to keep track of the expenses they have incurred.
This method, however, can only be used when the taxpayer did not incur any meal expense.
Thus, a taxpayer cannot claim incidental expenses if he or she had and claimed meal expenses during the business travel.
Let’s cite an example. Victoria was sent by his boss to a three day business trip to New York. She incurred meal expenses during that trip. She could have claimed half of the total amount of those meals under tax rules, but because she could not present the actual costs of the meals, she just opted to claim a standard meal allowance.
Standard Meal Allowance
For 2016, the federal standard meal allowance is $51 a day.
Thus, Victoria can write off $153 for her meals during that trip. However, because she had claimed meal expenses as tax deductions, then she won’t be allowed to deduct $15 as incidental expenses.
If Victoria didn’t claim any meal expenses, then she can write off the $15 incidental expenses that she incurred during the trip.
By using the standard meal allowance, Victoria has practically claimed both meal and incidental expenses.
Victoria can receive this allowance if her employer does any of the following:
- Provides her with lodging, or furnishes it in kind.
- Reimburses her for the actual cost of lodging basing on the receipts presented
- Pays for the lodging
- Expresses reservations about Victoria incurring lodging expenses. This may be due to her having friends or relatives in New York, where she can stay with.
- Devise an allowance based on a formula similar to computing Victoria’s compensation like number of hours worked or number of miles traveled.
As mentioned earlier, the M&IE allowance of $51 applies to most small localities in the United States. However, a higher allowance applies to bigger cities like San Francisco, and yes, New York. As of 2017, the M&IE allowance for New York is $74.
There’s also a special standard meal allowance for those working in the transportation industry. The IRS defines workers in the transportation industry as those who are directly involved in moving goods and people by various modes of transportation such as airplane, bus, barge, ship, or train.
Workers who are regularly required to travel away from their residence, and have to travel to different areas that are qualified for standard meal allowance rates, are also considered to be transportation workers by the IRS.
Those who are in the transportation industry get a standard meal allowance of $64 a day.
Claiming Per Diem
There are instances, though, when claiming the standard meal allowance or using the incidental expenses only method won’t suffice to cover the expenses incurred by a business owner or employee.
For example, what if Victoria had to shell out more than $30 in tips alone during her three-day trip? She might have brought a lot of bags so that meant she had to give tips to the bellboy and porter. She could have even given the taxi driver a tip for helping her carry her baggage.
One way that Victoria can reimburse those expenses is to claim per diem or per day. Per diem is a daily allowance for expenses that companies give to employees on a daily basis to cover expenses when on a business travel.
Per diem rates cover the costs of lodging, meals, and incidental expenses incurred by an employee during a business trip. If Victoria opts to use this method instead of the incidental expenses only method and the meal and incidental expenses allowance, then she can get reimbursed not just for the tips that she gave but also for her meals and lodging expenses.
Claiming per diem also has one distinct advantage—it spares employees from preparing documentation required to support business travel expenses. If Victoria opts for this method, then she no longer has to collect every receipt she gets during the trip. There’s also no need for her to note the time, place and purpose of each business meeting she attends. Moreover, she no longer has to hold on to those receipts and other documentation for two to three years, just in case the IRS calls in and questions her business travel deductions.
It can also mean faster reimbursement of expenses on the part of the employee, as there is no need to review and approve monthly expenses reports. It can also prevent processing delays caused by incomplete documentation, or when a supervisor inquires on the reasonableness of a claim.
Simply put, claiming per diem rate simplifies life for employees like Victoria.
However per diem rates aren’t paid to individuals who own more than 10 percent of the business. Thus, business owners cannot opt for this method in claiming tax deductions.
The IRS uses the high-low method in determining the per diem in certain areas in the United States. Simply put, employees who work in areas like San Francisco, Boston, and Washinton D.C. have a higher per diem rate than those working in areas in the ‘low cost’ list.
For the fiscal year 2017, the IRS has set the per diem rate for high costs areas at $282. The breakdown is $214 for lodging, and $68 for meals and incidental expenses. This applies to all high cost areas within the continental United States.
Some of the high cost areas for 2017 are Los Angeles, San Francisco, Santa Monica, Santa Barbara, and San Jose in California; Denver and Aspen in Colorado, and Sedona in Arizona.
Chicago, Maine, Maryland, and Seaside in Oregon are other high cost areas as defined by the IRS. In Florida, cities like Miami and Fort Lauderdale are classified as high cost areas.
Other areas where the per diem rate is $282 for 2017 are Hershey and Philadalphia in Pennsylvania, Park City in Utah, Seattle in Washington, Jamestown, Middletown, and Newport in Rhode Island, and Virginia Beach and Wallops Island in Virginia.
For all other areas, the per diem rate is $189 with lodging at $132 and meals and incidental expenses at $57.
Compared to the previous year, the rates have gone up by $7 for high cost areas and $4 for the low cost areas.
Employers should take note that lodging and meal and incidental expenses are separated from each other. Thus under certain circumstances, they can only reimburse for the meals and incidental expenses of their employers. For instance, if Victoria’s company paid for her hotel or lodging then she is only entitled to a per diem reimbursement of her meals and incidental expenses.
In such case, she can only receive a reimbursement of $68 for M&EI as the lodging costs have been shouldered by her employer.
It should be noted that transportation costs and mailing costs aren’t included in incidental expenses. These include transportation between places of business and lodging, as well as mailing expenses incurred for filing travel vouchers.
The IRS states that the high-low method must be used by companies in reimbursing their employees’ travel expenses within the continental United States for the fiscal year. However, it is up to them to use permissible method when it comes to reimbursing their employee expenses for business travel outside of the United States.
Employers are also required to continue using this method for an employee in the last three months of the fiscal year. This means that the same method utilized in the first nine months of the year should also be used for the final three months.
While tips extended to waiters, bellboys, and other servers are not as costly as meals and transportation expenses, the amount can quickly accumulate during a business trip. Fortunately for most employees, the IRS allows these expenses to be reimbursed either through the incidental expenses-only method, per diem, or the meal and incidental expenses method.