Tax Rules for Travel, Entertainment, Gift, and Car Expenses

To qualify for a tax deduction, a business expense must be both “ordinary and necessary.” An ordinary expense is common in your industry, while a necessary expense is helpful and appropriate for your business. While this principle is the foundation, the tax code applies specific rules to certain spending categories. This article covers the regulations for four common areas: business travel, entertainment, gifts, and vehicle use. Each category has its own limitations and documentation requirements that a business must follow to claim its rightful deductions.

Deducting Business Travel Expenses

To deduct travel expenses, you must be traveling away from your “tax home” for a period that requires sleep or rest. Your tax home is the city or metropolitan area of your main place of business, regardless of where your family lives. If a work assignment is temporary and expected to last one year or less, the associated travel is deductible. If an assignment is expected to last more than one year, that location becomes your new tax home, and travel costs between it and your family residence are non-deductible personal commuting expenses.

Deductible travel expenses include a range of costs incurred while away from your tax home for business. These include:

• Transportation costs such as airfare, train tickets, or the cost of driving your car to the business destination.
• The cost of lodging and non-entertainment meals.
• Dry cleaning and business calls.
• Incidental fees and tips given to porters, baggage carriers, and hotel staff.

You can only deduct 50% of the actual cost of business meals. As an alternative to tracking actual costs, you can use the standard meal allowance, or per diem rate, which varies by location. The 50% limitation still applies to the per diem allowance amount.

Trips that combine business with leisure require careful allocation of expenses. For travel within the United States, if the primary purpose of the trip is business, you can deduct 100% of your transportation costs. However, you can only deduct lodging and meal expenses for the days you spend on business activities. If the trip’s primary purpose is personal, you cannot deduct transportation costs but can still deduct expenses directly related to business conducted during the trip.

The rules for foreign travel are more stringent. If a trip is primarily for business but includes personal vacation time, you may need to allocate your transportation costs between business and personal days. The costs must be prorated unless the trip is a week or less, or if less than 25% of your time was spent on personal activities.

The Rules for Entertainment and Gift Expenses

The Tax Cuts and Jobs Act of 2017 eliminated the deduction for most entertainment expenses. The law disallows deductions for activities considered entertainment, amusement, or recreation, such as taking a client to a sporting event or concert. This disallowance extends to membership dues for clubs organized for business, pleasure, or social purposes, including country clubs, golf clubs, and athletic clubs. The cost of facilities used for entertainment, like a skybox or hospitality suite, is also non-deductible.

Despite the broad disallowance, a few exceptions remain. One is for recreational or social activities provided for the benefit of employees who are not highly compensated, such as a company’s annual holiday party or summer picnic. The costs for these events are 100% deductible. Expenses treated as compensation to an employee and included on their Form W-2 are also deductible by the employer.

Business meals remain 50% deductible under specific conditions. The expense must not be lavish or extravagant, the taxpayer or an employee must be present, and the meal must be with a current or potential business contact. If a meal takes place during an entertainment activity, the cost of the food and beverages must be stated separately on the bill or invoice to be deductible.

The rules for business gifts are separate from entertainment. You can deduct the cost of business gifts, but the deduction is limited to $25 per person, per year. If you and your spouse both give a gift to the same person, you are treated as one taxpayer and are subject to the single $25 limit.

Certain items are not subject to the $25 limit. Incidental costs, such as engraving, packaging, or shipping, are not included in the limit. Additionally, promotional items that cost $4 or less, have your business name permanently imprinted, and are distributed regularly are not subject to the annual limit. If an item could be considered either a gift or entertainment, such as event tickets, it will be classified as entertainment and is therefore non-deductible.

Claiming Car and Vehicle Expenses

When you use your vehicle for business, you can deduct the associated costs using either the standard mileage rate or the actual expense method. The cost of commuting from your home to your primary place of work is a personal expense and is never deductible, regardless of the method used.

The standard mileage rate is a simplified approach that allows you to deduct a set amount for each business mile you drive. The IRS sets this rate annually; for 2025, the rate is 70 cents per mile. This rate covers the variable costs of operating a car, such as gas and oil, and fixed costs like depreciation, insurance, and registration. If you use the standard mileage rate, you cannot deduct these individual costs separately.

Even when using the standard mileage rate, you can still take separate deductions for business-related parking fees and tolls. For self-employed individuals, the business portion of interest on a car loan may also be deductible. To have future flexibility, you must choose the standard mileage rate in the first year the car is available for business use.

The actual expense method involves tracking and deducting the specific costs of operating your vehicle. This requires keeping records of all car-related expenditures, including gas, oil, repairs, tires, insurance, registration fees, and depreciation. To calculate your deduction, you must first determine the percentage of your car’s use that was for business by dividing business miles by total miles driven.

You then apply this business-use percentage to your total vehicle expenses to find the deductible amount. Depreciation is a component of the actual expense method, but the tax code places annual limits on the amount you can claim for passenger automobiles. The standard mileage rate is simpler, while the actual expense method may yield a larger deduction for vehicles with high operating costs. If you first choose the actual expense method, you cannot switch to the standard mileage rate for that vehicle.

Substantiation and Recordkeeping Requirements

The IRS imposes strict substantiation rules for travel, gift, and car expenses. To claim a deduction, you must be able to prove specific details with adequate records or sufficient evidence. Failure to meet these requirements can result in the disallowance of your deductions.

For each expense, you must document several key elements:

• The amount of the expense.
• The time and date it was incurred.
• The place or location of the expense.
• The business purpose of the expense.
• The business relationship of the person or persons involved (for travel or client meals).

Acceptable records include a mileage log, account books, diaries, expense reports, and documentary evidence like receipts or paid bills. A mileage log is needed for car expenses and should show the dates of your business trips, your destination, the business purpose, and your starting and ending odometer readings.

The IRS provides an exception to the receipt requirement for a travel or transportation expense that is less than $75, though you must still log the other details of the expense. This exception does not apply to lodging, for which a receipt is always required regardless of the amount. For business gifts, you must keep a receipt to prove the cost.

You should maintain contemporaneous records, meaning you record the details of an expense at or near the time it occurs. Records created weeks or months later are less credible. You should keep all records that support an item of income or a deduction on a tax return for at least three years from the date you file the return.