Trade Show Tax Tips
Trade shows are great for finding new products and making profitable contacts, but 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 CPA and retired vice president of taxation at The American Institute of Certified Public Accountants (AICPA). “It’s the low-hanging fruit for auditors.”
Before you can deduct any expenses related to attending a trade show, determine if the event qualifies for tax deductibility. How? 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,” says Anderson.
But how about those shows that fall into a gray 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 advisor for guidance.
Once you are sure your trade show qualifies, you can deduct a wide variety of expenses related to your trip, from airline fares to car rentals to hotels and meals. For a complete list, see the sidebar, “What Can We Deduct?”
Let’s cover some fine points to keep in mind when you take your deductions.
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, 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 incurred 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,” says Benedict. “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 keeping adequate records or sufficient evidence, cautions Benedict. Record and keep receipts showing the dollar amount, the time and place, and the business purpose of your meals.
Per diem rates
Itemizing expenses while traveling can be a chore. You can save yourself 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 record keeping,” 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.”
There’s a downside. “The per diem is often either too high or too low,” says Anderson. “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).” Visit the website of the Internal Revenue Service at www.irs.gov and enter “Publication 1542” in the search box.
How about spouses or other individuals who are traveling to the trade show but 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,” says Anderson. “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,” says Anderson. “Just remember to go back to the fundamental rule: Expenses are only deductible if the travel serves a business purpose.”
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,” says Benedict. “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 is not deductible, but the expense associated with the business portion of the trip is deductible,” says Benedict.
Knowing which travel expenses are deductible is a great help at 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 these expenses.
“For each 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,” says Benedict. “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.”
Does This Trade Show Qualify?
Some trade shows qualify for tax deductibility. Others don’t. How can you tell which is which? “A good rule of thumb is the trade show should be ordinary and necessary,” says Andrew Benedict, tax manager at RGA Advisors, New York City. “An expense is deemed to be ordinary if it is common and accepted in the trade or business you are in. It is necessary if it is appropriate and helpful to your trade or business.”
Tax experts advise retaining some documents to support your claim that a certain show served a legitimate business purpose. Here are some examples:
- A conference agenda describing business-oriented sessions
- A list of exhibitors who serve your business
- A catalog of business-oriented seminars (circle the ones you attended)
- Business cards and vendor leaflets
What Can We Deduct?
Attending a trade show can be costly in terms of travel expenses. Which ones can you deduct at tax time? Here’s a list of the most common categories from Andrew Benedict, tax manager at RGA Advisors, New York City:
- Air, rail, bus, or car fares
- Baggage charges
- Taxi, commuter bus, or airport limousine fares
- Expenses of operating your vehicle while traveling away from home
- Tolls and parking
- Cleaning and laundry
- Business telephone calls
- Tips and other incidental expenses
- Admission and seminar fees
Still Need Help?
You want to make sure you deduct all your allowable travel expenses when you attend a trade show. While this article covers the basics, there are many fine points to consider. Additional guidance is available from The Internal Revenue Service in “Publication 463: Travel, Entertainment, Gift, and Car Expenses.” To get your copy online, go to www.irs.gov/formspubs and enter “463” in the search box. As always, when in doubt, consult a tax professional.
First published in Vol. 26 No. 7 of Retailing Insight. © 2012Continuity Publishing Inc. All rights reserved.