Like a lot of tax rules, the rules regarding business travel expense deductions can be confusing. This update discusses some things you should know about deducting these expenses.
Whether taxed as an entity or sole proprietor, ordinary and necessary traveling expenses can be deducted from income; however, it is important to understand the key definitions in the Tax Code related to travel expenses to avoid scrutiny by the IRS.
In general, travel expenses can be deducted from business income when an individual must travel away from their tax home or main place of work for business reasons. An individual is traveling away from their tax home if they are away for more than an ordinary workday and they need to sleep to meet the demands of their work while away.
An individual’s tax home is their regular place of business or post of duty – not their personal residence. This can include the entire city or general area where the individual’s work or business is located. If a business operates in more than one location, the main place of business or work is determined by:
- The total time the employee ordinarily spends in each place,
- The level of business activity in each place, and
- How much money the employee earns at each place.
At times, an employee may also be considered traveling away from their tax home for an extended period of time. If the employee is given a temporary work assignment it would be at a single location and expected to last a year or less. The employer may deduct related travel expenses if the employer paid or incurred those expenses on behalf of the employee during their assignment.
If the work assignment is expected to last for more than one year, then an indefinite work assignment is established, and the employee’s tax home changes to the new work location. In this scenario, the employer can’t deduct the employee’s expenses as business travel expenses.
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 the individual’s trade or business. A necessary expense is one that is helpful or appropriate for the business; the expense does not need to be required to be necessary.
It is imperative to retain support for travel expenses by keeping a log noting the date, time, and cost of each separate business-related travel expense as well as the business purpose of the travel. The business traveler should keep well-organized records such as receipts, credit card statements, and bank statements as substantiation.
Common examples of deductible business travel expenses:
- Travel by airplane, train, bus, or car between the individual’s home and business destination,
- The cost of traveling between business locations
- Fares for taxis or other types of transportation between an airport or train station and a hotel, or from a hotel or to a work location,
- Shipping baggage and sample or display material 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.
Common examples of nondeductible business travel expenses:
- Lavish, extravagant, or personal expenses,
- Expenses to go to conventions for investment, political, social, or other purposes unrelated to the business,
- Cost of traveling between employees’ main place of business or work and their personal residence.