We can all thank George M. Cohan, not only for the fine patriotic songs he wrote but also for the court case he won against the IRS in 1930. In a prior year, George went on tour and misplaced all of his travel expense receipts. When it came time to do his taxes, he just estimated what he had spent. The IRS audited him and said in effect that his expenses would be disallowed because he couldn’t show the receipts. However, perhaps because he was a celebrity, the court was more favorable. His deductions were allowed since they were reasonable, even if he didn’t have the proof. All he really had to show was that he did indeed go on tour for so many days. After all, did the IRS think he did not eat even one meal during the tour? This case was the turning point in history that now allows taxpayers to simply list certain expenses in a date book and not keep any receipts. We’ll call them cash expenses.
Travel and entertainment expenses under $75 (that’s $74.99 or less) need no back up receipts as long as they are entered into a date book, diary or other such record book as they occur. Filling out the diary the night before the IRS audit with various colored pens and pencils is discouraged, although I’ll bet some folks have gotten away with it. Travel expenses include airfares, taxis, auto rental, service tips, laundry, and meals. So if in a day on tour, breakfast cost $26, lunch $45 and dinner $60 with tax and tip, these three entries would be OK since they are under $75 each, even though the daily total is over $75. The IRS will look at the reasonableness of the costs. If your annual income is six figures, you can probably afford more expensive restaurants than others who make much less. The exception for not keeping proof is the hotel bill. The hotel bill is important since it establishes your presence and the number of days in the out-of-town city. You must stay overnight to get the meal deduction. For out-of-town gigs for which you don’t stay overnight, only the transportation expense will be allowed. There are really three methods of accounting for the travel expenses:
1. Keep the actual receipts.
2. Keep the date book with entries of expenses under $75 as cash expenses.
3. Use the IRS prescribed per diem rates.
These are rates the IRS has given for cities all over the world. IRS Publication No. 1542 has the domestic rates, which are determined by the government’s General Services Administration. There is a breakdown for high-cost and low-cost areas. Call the IRS at 800-829-3676 to get Publication No. 1542.
Computer wizards can go online to http://www.policyworks.gov/. The link to per diem rates is found under the “Program” section of the menu.
For foreign travel, if you cash something like a traveler’s check at a bank, get a receipt that shows the exchange rate with the foreign currency. You need only use an average rate of exchange for the whole trip. If you don’t know the rate, the IRS usually accepts the Annual Average Foreign Exchange rates from the Federal Reserve. Those rates can be found online at http://federalreserve.gov/releases/ g5a/current/.
The best approach would be to total your U.S. and foreign-travel cash expenses by each of the three methods—receipts, date-book entries and IRS per-diem rates—and then take the highest one. But remember, it looks better if you’re consistent for the whole year, rather than use a different method for each trip.
That’s for your non-reimbursed expenses. But what if your employer reimburses you? In that case, you first must see if they reported the reimbursement to the IRS. If not, and if your expenses match what they reimburse, then it’s a wash and you needn’t show the expenses on your tax return. If your expenses are greater than the amount they gave you, only show the excess not reimbursed. If they did report it either on a 1099 or as part of your W-2, you must report their payment to you as income. To offset the income, you must show all of the expenses. Since one is never quite sure what the employer will report to the IRS months later, it’s best to always keep an ongoing record of the expenses.
For entertainment and “quiet” business meals to be acceptable as cash expenses, be sure to note down the six required elements: date, place, person entertained, position or title of the person, what was discussed, and amount spent. The person you entertained or dined with must be in some higher position? that might bring you income, such as a conductor or director. An argument that another singer might recommend you for a job works for me, but you’ll have to use your best persuasive acting technique to win over the IRS if audited. They’ll take the position that fellow employee singers on your level don’t count. Remember that for entertainment, “quite” business meals and out-of-town meals, you must account for 100 percent of the expenses, but by law, you currently will only be allowed 50 percent of the total expenses as a deduction.
Entertainment is treating someone to an event such as an opera. You must discuss some business either before, during, or after the event. For a sporting event, a discussion at anytime will probably be fine since it is usually so noisy. In the case of an opera or concert, need I mention no talking while the lights are down? A “quite” business meal means a business talk over a meal, usually in a restaurant. Catering a party at home is fine, but the IRS says that you must discuss business with everyone there at least at some point during the party. Opera singers should just get up and sing. That would qualify. Then it becomes a showcase. I’d bet George M did that often.
