*** The Health Care Programs Manual (HCPM) has been replaced by the Minnesota Health Care Programs Eligibility Policy Manual (EPM) as of June 1, 2016. Please refer to the EPM for current health care program policy information. ***
Effective: May 1, 2012 |
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20.25.20.20 - Travel, Transportation and Entertainment Expenses |
Archived: June 1, 2016 (Previous Versions) |
Self-employed clients may deduct some travel, transportation and entertainment expenses incurred for their self-employed business. This section explains how to deduct these expenses from self-employment gross receipts for MA Method A, MA Method B, MA-EPD and Medicare Savings Programs (MSP).
If using the client’s tax forms to calculate self-employment income, do not subtract transportation, travel or entertainment expenses that have already been deducted as business expenses on the tax forms. However, add to self-employment income business expenses deducted on the tax forms that are not allowed as business expenses for purposes of Minnesota Health Care Programs (MHCP).
This section contains an overview of IRS policy for deducting travel, transportation and entertainment expenses from self-employment income. This information may be helpful in calculating and verifying self-employment income using business ledgers or other records that show gross receipts and expenses. For more detailed information, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Ordinary and Necessary Expenses.
Ordinary and Necessary Expenses
Travel, transportation or entertainment expenses must be ordinary and necessary in order to be deducted from self-employment gross receipts.
l An ordinary expense is one that is common and accepted in the client’s trade or business.
l A necessary expense is one that is helpful and appropriate for the client’s business. An expense does not have to be required to be considered necessary.
Travel expenses are expenses incurred while traveling away from home for self-employed business. A client is traveling away from home if:
l The client’s duties require him or her to be away from the general area of their tax home substantially longer than an ordinary day's work, and
l The client needs to sleep or rest to meet the demands of his or her work while away from home.
Note: ”Tax home” is the regular place of business or post of duty, regardless of where the client maintains a family home. It includes the entire city or general area in which the business or work is located.
Examples of ordinary and necessary travel expenses
Determine which travel expenses are deductible if a client is traveling away from his or her tax home. Clients can deduct ordinary and necessary expenses they have when they travel away from home on self-employment business. Clients can deduct costs of the following expenses:
n Transportation while traveling
Travel by airplane, train, bus, or car between the client’s home and their business destination. If they were provided with a ticket or were riding free as a result of a frequent traveler or similar program, their cost is zero.
n Taxi, commuter bus, subway and airport limousine
Fares for these and other types of transportation that take the client between: The airport or station and the hotel, and the hotel and the work location of the client’s customers, the business meeting place, or the temporary work location.
n Baggage and shipping
Sending baggage and sample or display material between the client’s regular and temporary work locations.
n Car
Operating and maintaining the client’s car when traveling away from home on business. See Car Expenses for more information.
n Lodging and Meals
The client’s lodging and meals if their business trip is overnight or long enough that they need to stop for sleep or rest to properly perform their duties. Meals include amounts spent for food, beverages, taxes and related tips. See IRS Publication 463, Chapter 1 for more information on calculating the cost of meals.
n Cleaning
Dry cleaning and laundry while traveling for business.
n Telephone
Business calls while on the business trip. This includes business communication by fax machine or other communication devices.
n Tips
Tips clients pay for any ordinary and necessary travel expenses.
n Other
Other similar ordinary and necessary expenses related to the client’s business travel. These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, toll costs and operating and maintaining a house trailer.
Transportation expenses are expenses not incurred while traveling away from home for self-employed business. (See Travel Expenses for information on traveling away from home). Transportation while not traveling away from home includes, but is not limited to:
l Getting from one workplace to another in the course of business or profession when traveling within the city or general area that is the client’s tax home.
l Visiting clients or customers.
l Going to a business meeting away from the regular workplace.
If the client incurs transportation expenses while not traveling away from their home, determine which transportation expenses are deductible. Clients can deduct ordinary and necessary transportation expenses they incur during conducting their self-employment business. Examples of ordinary and necessary expenses include:
l Cost of transportation by air, rail, bus, taxi, etc. (tickets, fares, etc.),
l Parking fees,
l Road tolls.
l Interest on a car loan.
l Cost of driving and maintaining your car. Determining the amount to deduct for car expenses varies by MHCP. See Car Expenses for more information.
Transportation expenses do not include:
l Commuting expenses. Commuting expenses include the costs of taking a bus, trolley, subway, or taxi, or of driving a car between home and the main or regular place of work.
n These costs cannot be deducted as business expenses no matter how far the client’s home is from their regular place of work.
n Clients cannot deduct commuting expenses even if they work during the commuting trip.
l Personal use of transportation is not a business expense. Prorate the cost of transportation used for self-employment and personal needs based on the percentage of use for each.
l Expenses incurred while traveling away from home overnight. See Travel Expenses.
Certain car expenses may also be deducted as transportation expenses. Clients calculating their self-employed income for tax purposes may use either one of the following methods for determining their deduction for transportation-related car expenses:
l Standard IRS mileage rate. The following expenses cannot be deducted if this method is used: lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance, or vehicle registration fees.
Note: Business-related parking fees and tolls may be deducted even if the standard IRS mileage rate is used. However, parking fees that the client pays to park at or near their regular place of work are nondeductible commuting expenses. The interest expense on a car loan that represents the business use of the car may also be deducted even if the standard IRS mileage rate is used.
l Actual car expenses. These expenses include: licenses, lease payments, registration fees, gas, insurance, repairs, oil, garage rent, tires, tolls, parking fees.
Note: Do not include commuting expenses as part of the actual car expenses.
When determining self-employment income for MA Method A eligibility, use the standard mileage rate to calculate transportation-related car expenses. This is true even if:
l Actual car expenses exceed the standard mileage rate,
l The client used actual car expense for tax purposes, or
l The client is not eligible to use the standard mileage rate for tax purposes.
Note: If the client used actual car expenses on their tax forms, recalculate their transportation-related car expense deduction using the standard IRS mileage rate.
When determining self-employment income for MA Method B, MA-EPD, MSP and LTC eligibility, either the standard mileage rate or actual car expenses may be used. Use the method the client uses on their tax forms or business records, even if the other method would result in a larger deduction.
MA Method A clients cannot deduct personal and business entertainment expenses. Add back any personal or business entertainment expenses deducted when calculating the net self-employment income for MA Method A.
MA Method B, Medicare Savings Programs and MA-EPD clients may be able to deduct 50% of their unreimbursed ordinary and necessary business-related entertainment expenses they have for entertaining a client, customer, or employee. Entertainment expenses include any activity generally considered to provide entertainment, amusement, or recreation, and meals provided to a customer or client. The expenses must meet one of two tests in order to be deducted from self-employment income:
l Directly-related test:
n Entertainment took place in a clear business setting, or
n Main purpose of entertainment was the active conduct of business, and the client did engage in business with the person during the entertainment period, and the client had more than a general expectation of getting income or some other specific business benefit.
l Associated test:
n Entertainment is associated with the client’s trade or business, and
n Entertainment directly precedes or follows a substantial business discussion.
In addition, clients:
l Cannot deduct the cost of a meal as an entertainment expense if they are claiming the meal as a travel expense.
l Cannot deduct expenses that are lavish or extravagant under the circumstances. An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances.