Government will pick up portion of travel expenses

Uncle Sam, in the form of our tax laws, is willing to pick up a portion of the expenses of every veterinarian attending a trade show, meeting or similar event.

That's right. Every veterinary practice, the principal and employees of that veterinary practice (even an owner/employee), can legitimately claim an income tax deduction for the expenses paid or incurred in attending a trade show or convention.

In fact, a veterinarian's bills for entertainment also can be partially underwritten with tax deductions whether that entertainment is related to convention travel or merely for promotional purposes. Entertaining can mean entertaining guests at night clubs, sporting events, theaters, although the type of business or practice must be considered when trying to determine what constitutes legitimate business expenses. A plumber, for example, might find himself or herself hard-pressed to justify jetting around the country unless it were to attend a trade show or convention.

Every veterinarian can reap a tax deduction while enjoying both business or practice-related travel and entertainment expenses. However, travel and entertainment expenses, unlike many other business deductions, are subject to special limits. For example, with a number of notable exceptions, only 50 percent of meal and entertainment expenses are tax deductible.

Naturally, that 50 percent rule doesn't apply to expenses for goods, services and facilities made available to the general public, such as when a restaurant offers free meals on occasion to good customers.

Eating as entertainment

Under our federal tax rules entertainment-related meal expenses are not tax deductible unless it is directly related to the active conduct of a trade or business. If a meal expense directly precedes or follows what the IRS considers a "substantial and bona fide" business discussion (including a business discussion at a convention), then it is tax deductible - so long as it was "associated" with the active conduct of the veterinary practice.

There are two additional restrictions placed on the deduction for meal expenses: (1) meal expenses are rarely tax deductible if neither the veterinarian nor a representative of the practice is present at the meal, and (2) no deduction will be allowed for food and beverages to the extent that the expense is lavish or extravagant under the circumstances.

Fortunately, the following entertainment expenses are deductible so long as they meet the "ordinary and necessary" requirements for all business expenses and if they are properly substantiated. They may, of course, be subject to the 50 percent rule:

· Food and beverages for employees furnished on the veterinary practice's business premises.

· Expenses for services, goods and facilities that are treated as compensation or wages for withholding tax purposes.

· Recreational expenses primarily for employees who, for this purpose, are not highly compensated. A good example of this expense would be a company picnic.

· Expenses of employees', principals', agents' or directors' business meetings.

· Expenses directly related and necessary to attendance at a business meeting of a tax-exempt business league, including a real estate board, chamber of commerce or board of trade.

· Goods, services and facilities that are furnished to nonemployees as entertainment, amusement or recreation expenses and that are includable in the recipients' incomes.

Better than nothing

As already mentioned, the amount allowed as a tax deduction for meal and entertainment expenses is generally limited to 50 percent of the amount actually spent. Food and beverage costs incurred in the course of travel away from home also fall within the scope of this rule.

What's more, the 50 percent rule is applied only after determining the amount of the otherwise allowable deductions. In other words, the portion of a travel meal that is lavish and extravagant must first be subtracted from the meal cost before the 50 percent reduction is applied. Related expenses, such as taxes and tips for entertainment expenses, must be included in the total expense before applying the 50 percent reduction. Any allowable deductions for transportation costs to and from a business meal are not, of course, reduced.

Similarly, the cost of a ticket package to a sporting event and related expenses is also exempt from the 50 percent reduction - if the event is organized to benefit a tax-exempt group and volunteers provide substantially all of the work in carrying out the event. In other situations, a deduction for a ticket may not exceed the ticket's face value.

Those very few veterinarians contemplating skybox rental should keep in mind that if a skybox is rented for more than one event, the deduction cannot exceed the price on non-luxury box seats (subject to the usual 50 percent limit). While expenses for recreational facilities primarily for the benefit of employees are usually deductible, no deduction is generally allowed for any expense for entertainment facilities such as yachts, hunting lodges, swimming pools, tennis courts or bowling alleys.

Substantiate it

Whether for routine travel and entertainment or for convention-related expenses, in order to claim any tax deductions, a veterinarian must be able to prove that the expenses were in fact paid or incurred.

What's more, number of expenses, which our lawmakers deem as particularly susceptible to abuse, must also be substantiated by adequate records: expenses relating to travel away from home (including meals and lodging), entertainment expenses, business gifts and all expenses in connection with use of so-called "listed property" such as cars and computers.

T&E expenses must be substantiated as to (1) amount, (2) time and place and (3) business purpose. For entertainment and gift expenses, the business relationship of the person being entertained or receiving the gift must also be substantiated.

An employee's expenses are considered to be substantiated if the employee provides an adequate accounting of those expenses to the employer. In this situation, the adequate accounting requirement can be satisfied by using a "per diem" allowance for lodging and/or meal and incidental expenses.

Many sales professionals long ago discovered that a contemporaneous log is not required although a record of the elements of the expense or use of the listed property should be made at or near the time of the expenditure or use - supported by sufficient documentary evidence. This has a high degree of creditability.

Adequate accounting generally requires the submission of an account book, expense diary or log, or similar record maintained by the employee and recorded at or near the time of occurrence of the expense. Documentary evidence such as receipts or paid bills, is not usually required for expenses that are less than $75. Documentary evidence for lodging expense is mandatory.

The so-called "Cohan rule," which has been used by the courts to estimate the amount of a taxpayer's expenses when adequate records do not exist, may not be used to estimate T&E expenses. Naturally, if any veterinarian can establish that the records were lost due to circumstances beyond his or her control, such as destruction by fire or flood, then the veterinarian does have a right to substantiate deductions using a reasonable construction of the expenditure or use.

Get away from home

There are valid reasons why any veterinarian would travel in connection with business. Conventions, trade shows, educational meetings and distant suppliers all leap to mind.

In general, a tax deduction is allowed for ordinary and necessary traveling expense incurred by any veterinarian while away for home in the conduct of their veterinary practice.

Being "away from home" means that the veterinarian's duties require him or her to be away from the general area of their tax homes longer than an ordinary workday or that it might be reasonable for them to need sleep or rest. In fact, in some cases, travel expenses may be deductible even though a veterinarian is away from home for a period of less than 24 hours.

When the veterinary practice has offices or clinics in multiple areas, the principal place of business is treated as the tax home. Business travel expenses incurred while away from the principal place of business are deductible.

What is deductible? The following expenses paid or incurred while traveling away from home are ordinarily considered tax deductible: travel, meals and lodging; transportation, plus a reasonable amount for baggage, necessary supplies and display materials; hotel rooms, sample rooms, telephone and FAX services and public stenographers; as well as the costs (including depreciation) of maintaining and operating a car for business purposes.

Travel expenses are not allowed for a spouse, dependent or other individual who accompanies the veterinarian on a business trip unless that person is an employee of the person or practice that is paying or reimbursing the expenses. The travel of that spouse or family member or other person must also serve a bona fide business purpose.

The goal of a every practice is to make money and, in many veterinary practices, entertainment and travel contribute to a more profitable practice. In addition to being an enjoyable fringe benefit, conventions attendance, business-related travel and especially entertainment can be quite economical, the costs defrayed with some smart tax planning.

Mr. Battersby is a financial consultant in Ardmore, Pa.