Maximizing your Deductions for Travel Expenses

 

Travel expenses can add up to be a big expense for businesses.  Let’s talk about what the tax rules are around deducting travel expenses and what you should know about getting the most out of your deduction. 

When talking about deducting travel expenses, we first must talk about where is your tax home. 

What is a tax home?   It’s an IRS term that means the general area where you conduct your regular place of business.  It’s determined by how much time you spend there, how much business activity you have there and how much money you earn there.  Your tax home could be obvious if you’re a dental office, for instance.  However, it could be complicated depending on your circumstances.  The reason the definition of your tax home is important is because depending on your situation, your travel expenses can be treated differently.  For instance, if you have a business in St. Louis but you are regularly in Chicago weekly conducting business, then the IRS may disallow your travel because they determine your tax home is in Chicago.  We’ll talk more about your tax home later, but just know it’s important in determining your travel deduction.    

So, when are business travel expenses deductible?

Business travel expenses can be deducted when you must travel away from your tax home or main place of work for business reasons.

You can't deduct the cost of commuting between your home and business unless your home is your tax home, and you qualify for business use of the home.  However, you can deduct the cost of traveling between business locations. 

Temporary work assignments

If that assignment is temporary, the individual's tax home doesn't change, and the individual is away from home for the entire period of the assignment. Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for one year or less.

As an employer, you can deduct an employee's travel expenses if the employer paid or incurred those expenses during an employee's temporary work assignment and the employee's work assignment doesn't last for more than one year.

Indefinite work assignments

 If an employee is given an indefinite work assignment at a different location, then the employee's tax home changes to the new work location. In this situation, the employer can't deduct the employee's expenses as business travel expenses while they are working at the new location because the employee isn't traveling away from his or her tax home. A work assignment or job in a single location is indefinite if it is realistically expected to last for more than one year (whether or not it actually lasts for more than one year).

Note for the employer:  Employees with indefinite work assignments must include in income any amounts they receive from their employer for living expenses.

What travel expenses can I deduct?

To be deductible, business travel expenses must be ordinary and necessary expenses for traveling away from home for a business, profession, or job.  An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful or appropriate for the business. Lavish, extravagant or personal expenses are not ordinary or necessary.

An expense doesn't have to be required to be considered necessary.

Examples of deductible business travel expenses include:

·        Travel by airplane, train, bus or car between the individual's home and business destination,

·        Fares for taxis, UBER or other types of transportation between an airport or train station and a hotel, or from a hotel or to a work location,

·        Baggage fees and shipping items between regular and temporary work locations,

·        Using a personal car for business travel,

·        Lodging and meals while away,

·        Dry cleaning and laundry while away, and

·        Tips paid for services related to any of these expenses.

·        Other similar ordinary and necessary expenses related to the business travel.

Conventions, seminars and meetings

Generally, business travel expenses for conventions, seminars and meetings are deductible if attendance at the event benefits the business. 

Note.  Expenses to go to conventions for investment, political, social, or other purposes unrelated to the your trade or business are not deductible.

However, expenses for attending conventions, seminars and meetings that are held outside the North American area (NAA) are usually not deductible unless:

•             The meeting is directly related to the active conduct of your business, and

•             It is reasonable to hold the meeting outside the NAA. 

Keeping records

The IRS requirement for record keeping applies to travel expenses as well.  You should keep well-organized records that substantiate the amount, time, place and business purpose of their travel expenses. You are required to substantiate the cost of each separate expense for travel, lodging and meals. Incidental expenses may be totaled in reasonable categories, such as taxis, fees, and tips.

Besides keeping receipts, canceled checks, credit card statements, bank statements (for debit card purchases) and other documents, you should keep a diary, log or a calendar noting the dates and times of any business travel, as well as the business reason for that travel.  There are additional rules for breaking out deductions for travel that is part business and part personal.

Travel expenses can add up to big deductions for businesses but can also be a target for an IRS audit.  We can work with you to help you receive all of your allowed travel deductions while complying with the IRS rules on travel expenses.