What Are Travel and Entertainment (T&E) Expenses?

Travel and Entertainment (T&E) expenses are business costs. These expenditures arise when employees or business owners travel for work or engage in activities designed to promote business interests. Understanding and accurately tracking these expenditures is essential for financial management, tax compliance, and claiming eligible deductions.

Travel Expenses

Travel expenses include the ordinary and necessary costs of business travel conducted away from one’s tax home. For an expense to qualify, the travel must require the individual to be away from the general area of their main place of business for a period substantially longer than an ordinary workday, necessitating sleep or rest. This typically implies an overnight stay, differentiating deductible travel from daily commuting.

Deductible travel costs include transportation between the tax home and business destination, such as airfare, train tickets, bus fares, or car expenses. Local transportation at the business destination, like taxi fares or rideshare services between the airport, hotel, and meeting locations, is also covered. Lodging expenses, including hotel stays, are also deductible. Additionally, meals consumed while away from home on business are typically deductible, though generally limited to 50% of their cost. Other related expenses, such as dry cleaning, laundry, and business calls made during the trip, may also be included.

A “tax home” is the entire city or general area where an individual’s main place of business or work is located, not their personal residence. If an individual works in multiple locations, their tax home is usually where they spend the most time, conduct the most business, and earn the most income. Expenses are not considered deductible if they are lavish, extravagant, or primarily for personal purposes.

Entertainment Expenses

Entertainment expenses traditionally covered activities providing amusement or recreation, often with a business associate. However, the Tax Cuts and Jobs Act (TCJA) of 2017 significantly changed the deductibility of these expenses, largely eliminating deductions for most business-related entertainment paid after 2017. This means that costs for activities like sporting events, theater tickets, golf outings, or similar recreational events provided to clients or customers are no longer deductible.

Despite these changes, certain business meal expenses may still be 50% deductible if specific criteria are met. The meal must not be lavish or extravagant. The taxpayer or an employee must be present, and the meal provided to a business associate (e.g., a current or potential client, customer, or consultant). Furthermore, there must be a clear business purpose for the meal, such as discussing business during or immediately before or after the meal.

Food and beverages provided with an entertainment activity may still be 50% deductible if purchased separately or separately stated on a bill. For example, if a meal is served at a sporting event, the cost of the meal might be deductible even if the ticket to the event is not. There are also instances where certain meal and entertainment expenses remain 100% deductible, such as recreational, social, or similar activities primarily for the benefit of employees, like a company-wide holiday party or picnic.

Why T&E Expenses are Tracked

Tracking T&E expenses serves multiple financial and operational purposes for businesses. One primary reason is to manage tax implications, as properly documented travel and certain meal expenses can be eligible for tax deductions. Accurate record-keeping ensures that businesses can substantiate these expenses to tax authorities, minimizing tax liabilities. Without meticulous tracking, legitimate deductions might be overlooked or disallowed during an audit.

Beyond tax benefits, tracking T&E expenses provides essential data for budgeting and financial control. Monitoring these expenditures offers insights into spending patterns, enabling businesses to establish realistic budgets and identify areas for cost optimization. This oversight helps prevent overspending and maintains healthy cash flow. Consistent tracking also supports financial forecasting and strategic planning.

Tracking also facilitates employee reimbursement. Employees often incur out-of-pocket expenses for business travel and client entertainment, requiring a system for accurate reimbursement. A structured tracking process ensures timely and accurate reimbursement, which is important for employee satisfaction and adherence to company policies. This process often involves submitting expense reports with supporting documentation.

Tracking T&E expenses also helps businesses maintain compliance with internal policies and external regulations. Proper record-keeping is a fundamental requirement for demonstrating that expenses align with company guidelines and meet the standards set by tax laws. This meticulous approach prepares a business for potential audits, proving the legitimacy and business purpose of each expense.

Documenting T&E Expenses

Effective documentation of T&E expenses is fundamental for financial management and compliance. It involves capturing specific details for each expenditure to substantiate its business purpose and amount. Retaining receipts and other supporting documents is important for all expenses, particularly those exceeding a certain threshold, such as $75.

For each expense, essential information to record includes the exact amount spent and the date the expense was incurred. The place where it occurred (e.g., restaurant or hotel) is also necessary. Most importantly, the business purpose of the expense must be clearly articulated. This explanation clarifies why the expense was necessary for business operations.

For meal expenses, it is also important to record the names of the individuals who attended and their business relationship to the taxpayer. This helps establish the business context. Common methods for documenting these expenses include maintaining physical receipts, scanning receipts to create digital copies, and utilizing expense reports or basic expense tracking software. These records should be organized systematically to facilitate easy retrieval for accounting purposes or in the event of an audit.