Definitions of Travel Expenses for Tax Purposes
Learn the difference between an "ordinary and necessary" expense and a "lavish and extravagant" expense for IRS tax purposes. Definitions below.
"Ordinary and Necessary" Expense
An expense is “ordinary” if it is customary and conventional for the taxpayer’s line of business. A “necessary” expense is helpful in the taxpayer’s business; but it need not be indispensable.
"Lavish or Extravagant"
The term lavish or extravagant is frequently used in the tax code. Unfortunately, nowhere in the Code are the words lavish or extravagant defined in a measurable way. For example, in relation to business meals, Sec 274(k)(1)(A) says “lavish or extravagant under the circumstances”. So, it boils down to a facts and circumstances determination.
As an example of under the circumstances…what if a Boeing salesman was trying to close a billion-dollar aircraft sale and purchased a $1,000 bottle of wine while dining with a potential customer? We hope you get the drift. In fact, IRS Pub 463 says this about “lavish and extravagant” and facts and circumstances: “Meal expenses won't be disallowed merely because they are more than a fixed dollar amount or because the meals take place at deluxe restaurants, hotels, or resorts.