Tax Tips Part III
Professional Dance Business Tax Tips
Part III: Travel Expenses
By Ma*Shuqa Mira Murjan
You can deduct the cost of travel connected with your dancing job or other income producing activity related to your job of dancing. This includes travel between two or more job locations the same day, travel to professional meetings, travel related to a temporary job away from home, travel to obtain education, travel in connection with an outside business activity, etc. An exception is ordinary commuting expenses which cannot be deducted. There are special rules which apply to various types of deductible travel and are discussed in several sections of this article.
Where on the income tax form do you claim travel expenses?
Self-employed dancers claim travel expenses on Schedule C or Schedule C-EX the same as any other business expense related to their self-employment activity. Itemizers as well as non-itemizers get to deduct travel expenses.
An employee reports his job-related travel expenses on Form 2106, employee business expenses. The total of expenses is transferred to Schedule A as a miscellaneous deduction and is subjected to a 2% Adjusted Gross Income floor.
Which expenses are deductible?
The first point to note is the distinction between travel and transportation expenses. Transportation refers to the task of getting from one place to another. But travel expenses may include, in addition to transportation expenses, certain living costs.
Let’s assume that your travel meets the requirements for deductibility. Then, if you are away from home overnight, the following are deductible travel expenses:
A. Lodging both en route and at your destination
B. Meals both enroute and at your destination
C. Transportation costs to and from your destination
D. Baggage charges
E. Reasonable cleaning and laundry expenses
F. Transportation between the airport and your hotel
G. Transportation between where you obtain meals and lodging and a temporary work assignment
H. Telephone and fax expenses (non-personal)
I. Reasonable tips connected with the above expenses
If, you are not away from home overnight, then only your transportation costs are deductible.
What does “away from home” mean?
According to the IRS, “home” means the general area of your principal place of employment, regardless of where you maintain your family residence. For example, when I worked and lived in Germany in 1982-83 tax years, and maintained the family residence in Los Gatos, California; then my “tax home” was Los Gatos since it was still the principal place of employment because of my dance studio. However, work in San Francisco which requires an overnight stay would be outside of the general area because it is beyond 50 miles, which the IRS considers a different area away from home.
What about commuting costs?
In general, the cost of commuting between your residence and your work is not deductible. However, there are two exceptions relating to temporary assignments away from your home:
1. If you are on business trip out of town or if you are on a temporary assignment out of town, you may deduct all your transportation costs between your temporary lodgings and your business destination. You may also deduct all tran-sportation costs from one business destination to another.
2. If you are required to work at a temporary location outside the general area of your home city, you may deduct transportation costs between your temporary lodgings and your business destination.
For example, during my employment as an aerobics instructor and dance instructor and performer in Germany, I was able to deduct the cost of my airflight to and from Frankfurt, Germany. During my employment I deducted the costs of travel to and between each of the four shows that I performed on New Year’s Eve in three different cities, which amounted to over150 miles.
80% rules for meal expenses
Meal expenses are not deductible in full. Only 80% of the meal (and beverages) expenses can be deducted. All expenses of the meal such as tax, tips, parking, etc. are included under this 80%-Rule. However, transportation to and from a meal is not subject to the reduction. The 80%-Rule is used before application of the 2% of Adjusted Gross Income floor that applies to the total of miscellaneous deductions for employees.
Expenses of spouse or other family member
If you traveled for professional reasons during 1993 and were accompanied by your spouse or other family members, their expenses are not deductible unless it can be definitely established that their travel has a bona fide business purpose. The performance of incidental services does not satisfy this business purpose requirement. For example, when my husband, Carl, traveled with me for my seminar in Oklahoma City with Soraya; although he was recruited to run the spotlight for the evening show and was the sound person for the seminar, his services were not contracted and are therefore considered “incidental services”.
However, the good news about travel expense deductions is that if your spouse accompanies you on a business trip, you do not have to split your expenses down the middle. Instead, you can deduct what it would have cost you had you traveled alone. For example, if you and your spouse occupy a double room at a hotel which charges $120 for a single room and $180 for a double room, then you may deduct $120 as your lodging cost.
Recordkeeping requirements: an expense diary
When facing an IRS audit you must show that expense deductions for your business were recorded in a timely fashion and are legitimately related to a professional dance business. It will probably not suffice to bring a “trunkload of costumes” into the IRS office for your tax review.
You should keep two kinds of records of your travel expenses—receipts and an expense diary. You do not include these records with the tax return you file with the IRS. Rather, they are kept in case your return is audited. During my IRS audit, is was helpful to the IRS agent’s review process to have brought the tax year file and documentation with us. An IRS audit can be a courteous and pleasant one if you can assist the IRS agent by providing receipt and expense diary documentation to clarify any questions about the appropriateness of deductions taken.
From my personal experience I recommend that you keep the following information in your expense diary:
1. The place or places of your travel.
2. The dates of your departure and return home.
3. The business reason for your travel.
4. A daily list of your deductible expenses.
You should list the amount of each separate expenditure (such as the cost of your transportation or lodging). However, each day the cost of your breakfast, lunch, dinner, and other expenses may be grouped together if they are set forth in reasonable categories such as can be found in expense report forms or in personal organizers: meals, transportation (taxi, rental cars, gasoline, parking fees), telephone charges. Tips may be grouped with the cost of the connected service itemized, such as meals or taxis.
A receipt, paid bill, or similar evidence is required to support any expenditures of $25 or more and any expenditure for lodging, even if less than $25. The receipt should show the amount, date, place, and type of expenditure and should be sufficiently detailed to show the different elements of the expenditure. For example, a hotel bill should show as separate items, the cost for lodging, telephone calls, meals, etc. A canceled check or credit card statement together with an appropriate bill will be sufficient. Note that a canceled check alone is inadequate documentation.
Your records should be timely. You should write down your expenses in your expense diary at or near the time they are incurred. If you cannot establish the portion of an expenditure attributable to each person participating in the travel but you have established the amount of the total expenditure, you can allocate expenditures on a pro rata basis. If the record entries are made later when there is a lack of accurate recall, they will not comply with the pro rata basis rule for travel with other persons. Remember this next time you travel to a dance seminar with other dance professionals and share lodging together and split the meal expenses. Note that five different pieces of expenditure information is required: date, item, place, amount and business purpose. If you leave any of these pieces out, your travel expenses could be ruled nondeductible.
The substantiation rules are not so strict for local travel as for travel far away from home. In particular, the keeping of a contemporaneous diary would not be mandatory if the traveling is done on a regular basis. This would be the case, say, when a dance professional/instructor regularly travels between locations to teach and to perform, as in weekly dance sessions and regularly scheduled weekend performances.
What if you are missing records or receipts?
You are supposed to keep a contemporaneous diary and receipts, but legally speaking, this is not a strict necessity. You are entitled to offer other evidence in support of your deduction, as long as the five basic pieces of information are attested to. The Congressional tax-writing committee specifically noted that “testimony from a disinterested, unrelated party describing the taxpayer’s activities, may be of sufficient probative value that it should not be automatically excluded from consideration.” Records created at a later date might have some value, but would have far less probative value than written evidence arising at or near the time of the expenditure.
The tax courts have not been impressed with travel records in which entries were not made in a timely fashion. The tax court rules on deductibility of expense entries based on several factors. For example, if the travel diary shows little wear for being handled frequently and the ink for entries is suspiciously uniform in color and intensity. Or, adequacy of the travel diary may be a problem if some of the five basic pieces of information for travel are recorded later. Then, there is always the pitfall of recording suspiciously uniform numbers in the diary. It may be hard to believe, for instance, that expenses for an element of basic information required can remain so perfectly consistent throughout the entire tax year (with perhaps the except of parking fees). In another case, typed travel diary entries were ruled not made in a timely fashion and no deduction was allowed.
When some of the receipts are missing, the matter is not so serious. In the past the IRS agents disallowed deductions whenever required receipts were missing. Now the IRS goes a bit easier on this requirement according to these instructions:
“If a taxpayer cannot document precisely the amounts spent for expenses while away from home for a business purpose, examiners may establish that reasonable amounts were spent for such items if the taxpayer can clearly establish the following:
a) Time—dates of departure and return for each trip away from home and the number of days away from home.
b) Place—Destinations or locality of travel, e.g. name of city or town.
c) Business Purpose—business reason for travel or nature of business benefit derived or expected to be derived, and
d) Proof that expenditures were actually incurred—a reasonable showing based upon secondary evidence, including oral testimony that out-of-pocket expenses were paid.” (Internal Revenue Manual, Section 4244).
However, despite the liberal words of item (d), this should not be taken as a go-ahead to ignore the receipt-keeping requirement. IRS agents are only permitted, not required, to allow deductions without the required receipts. And this is only suggested when not too much documentation is missing. In a review of my expenses to attend nightclubs in Cairo to view performances by Nagwa Fouad and Sohair Zaki which were not included in the travel tour package, the travel tour itinerary sufficed to show that these expenses were in addition to the tour cost. At the time, Egyptian videos of famous performers were not readily available and one had to travel to Cairo as a part of professional continuing education business necessity.
Subsequent articles on tax deductions for travel expenses will cover: More than one job location (dancers who perform in multiple locations); Commuting to a temporary job near home (dancers traveling for special performances); Temporary jobs away from home (dancers “on the road” performing and/or teaching); Travel expenses while under a fellowship grant (more dancers are performing with troupes who are receiving grant money); Travel to seek employment (travel to promote and/or secure dance related employment); Travel to professional conventions; and Travel which combines business with pleasure: with-in the U.S. and overseas travel.
Having completed her MBA, Ma*Shuqa Mira Murjan now divides her time between her career as a university professor of business, her work as a business consultant, and her performing, teaching and continued study of Oriental dance. She is currently pursuing a Ph.D. in Educational Administration. www.mashuqa.com