Travel expenses--those costs that you have when you are away from home on business--can provide you with significant business expense deductions. However, they are subject to numerous rules that you must follow carefully or run the risk of an unpleasant surprise when you are audited.
Travel expenses are among the most common business expense deductions. However, this type of expense is also one of the most confusing! When is the cost of a trip deductible as a business expense? How about conventions - particularly in other cities? What if you bring your family?
It will be easier to plan your business trips, and to combine business with vacation when possible, if you become familiar with the IRS's ground rules.
The following is a list of expenses you may be able to deduct depending on the facts and circumstances:
- 50 percent of the cost of meals when traveling
- air, rail, and bus fares
- baggage charges
- hotel expenses
- expenses of operating and maintaining a car, including the cost of gas, oil, lubrication, washing, repairs, parts, tires, supplies, parking fees, and tolls
- expenses of operating and maintaining house-trailers—provided using one is "ordinary" and "necessary" for your business
- local transportation costs for taxi fares or other transportation between the airport or station and a hotel, from one customer to another, or from one place of business to another, and tips incidental to the foregoing expenses
- cleaning and laundry expenses
- computer rental fees
- public stenographer fees
- telephone or fax expenses
- tips on eligible expenses
- transportation costs for sample and display materials and sample room costs
Travel expenses must be business-related
Your travel must be primarily business-related in order to be deductible. Pleasure trips are never deductible. You can deduct travel expenses only if you are traveling away from home in connection with the pursuit of an existing business.
Travel expenses you incur in connection with acquiring or starting a new business are not deductible as business expenses. However, you can add these costs to your startup expenses and elect to deduct a portion of them and amortize the remainder over 180 months.
Tip: If your spouse travels with you, you usually can not claim any deduction for your spouse's expenses. For the travel expenses of a spouse (or dependent or any other individual for that matter) to be deductible, the spouse (or other individual) must also be an employee of the business. In addition, the spouse's travel must be for a bona fide business purpose and the expenses must be otherwise deductible by the spouse.
Expenses must be ordinary, necessary and reasonable.
A travel expense is a type of business expense. Therefore, you must be able to meet the general business expense requirements in order to claim a deduction.
You can't deduct travel expenses to the extent that they are lavish or extravagant—the expenses must be reasonable considering the facts and circumstances. However, the IRS gives you a great deal of latitude here. Your expenses won't be denied simply because you decided to fly first class, or dine in four-star restaurants.
You must be "away from home" to deduct travel expenses.
It sounds obvious, but you must be traveling in order to deduct traveling expenses. That is you must be "away from home."
However, as with much of tax law, it's not as simple as it seems. For this purpose, you are traveling away from home if you meet the following two conditions:
- The travel is away from the general area or vicinity of your tax home.
- Your trip is long enough or far away enough that you can't reasonably be expected to complete the round trip without obtaining sleep or rest. This doesn't mean that you need to stay overnight at the destination; for example, it may be that you had an all-day meeting and needed to get a few hours sleep in a hotel before driving home.
Generally, your tax home is the entire general area or vicinity (e.g., a city and surrounding suburbs) of your principal place of business, regardless of the location of your personal or family's home.
There are special rules governing the following situations:
- More than one place of business. If you conduct your business in more than one place, you should consider the total time you ordinarily spend working in each place, the degree of your business activity in each place, and the relative amount of your income from each place to determine your "principal" place of business.
- No regular place of business. If you don't have a regular place of abode and no main place of business, you may be considered an itinerant - your tax home is wherever you work and, therefore, you can never satisfy the away-from-home requirement.
- Temporary assignment.When you are temporarily (a year or less), as opposed to indefinitely, working away from your main place of business, your tax home doesn't change—all your "away from home" expenses are deductible.
Allocation required if travel combines business and pleasure
What about travel that is both business-related and personal? The IRS is on the lookout for taxpayers who try to classify a nondeductible personal trip as a deductible business trip. So, if you travel to a destination and engage in both personal and business activities, you can deduct your traveling expenses to and from the destination only if the trip is primarily related to your business.
The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business. Travel expenses outside the U.S. may be further limited if any part of your trip is for personal purposes.
If the trip is primarily personal in nature, none of your traveling expenses are deductible. This is true even if you engage in some business activities while you are there. (However, you may be able to deduct particular expenses you incur while you're at your destination if they otherwise qualify as business deductions.)
Example: Kelly travels from Chicago, Illinois, to Phoenix, Arizona, to visit her good friend Susan for two weeks. While she is in Phoenix, she meets with two customers, buying them each lunch and discussing business contracts for the coming year. Kelly can not deduct the cost of the trip to Arizona. However, subject to the limitations on meal expenses, she can deduct the cost of the two business lunches.
Strict limits apply to meal costs
Meals eaten alone while traveling are deductible.
The cost of dining alone is a deductible expense only if your business trip is overnight or long enough to require that you stop for sleep or rest.
Of course, if you entertain business guests at home or away you may be able to deduct a portion of the cost, if you meet the usual deductibility rules for meals and entertainment. However, even if you meet the requirements, you can deduct only 50 percent of the cost of the meals.
A special exception to the 50 percent rule applies to workers who are away from home while working under Department of Transportation regulations. This group of workers includes air transportation employees, interstate truck and bus drivers, railroad employees, and merchant mariners. For these workers, meals are 80 percent deductible.
Standard meal allowance simplifies record keeping
Assuming that you are traveling away from home for the required length of time, you may elect to deduct half of a Standard Meal Allowance (SMA), rather than half of the actual cost of your meals, laundry, cleaning and tips.
The advantage to using the standard meal allowance is that you don't have to keep records of actual meal expenses, although you still have to keep records to prove the time, place, and business purpose of your travel. The biggest disadvantage is that the standard meal allowances are not very generous. Chances are that your actual expenses--and therefore your deductions--would be larger.
The standard meal allowance refers to the "federal rate for meals and incidental expenses" and the amount varies depending on where and when you travel. These per diem rates are updated periodically to reflect regional inflation and are published on the Internet at the General Service Administration website and in IRS Publication 1542, Per Diem Rates (for Travel Within the Continental United States).
Tip: There is also a per diem rate that includes lodging as well as meals and incidentals, but this combined per diem is generally not available to self-employed people.
However, many areas have much higher rates, and you should always check to make sure you are using the rate for your travel location. Assume that the standard meal allowance for most locations in Illinois is $46/day, but in Chicago, the amount is $71. This means that if you are in Chicago for business, you can deduct $12.50 more per day for meals than the "standard" rate.
Remember, you can deduct only 50% of the allowable amount: $35.50 for Chicago versus $23 for the standard rate.
For travel in areas outside the continental U.S., you can use federal per diem rates (OCONUS) that are published monthly by the government. The foreign per diem rates can be purchased from the Government Printing Office and are also available from the State Department.
IRS closely scrutinizes foreign travel expenses
Business-related foreign travel expenses are tax deductible. However, because of the potential for abuse (e.g., sneaking in a Paris vacation under the guise of a business trip), these expenses are scrutinized closely by the IRS.
Good documentation is an absolute must. If you travel outside the U.S. purely for business purposes, all your travel expenses of getting to and from your business destination are deductible. However, if you spend part of your time in a foreign country engaging in personal activities, you may have to allocate your travel expenses and only deduct the amounts allocated to business.
You must allocate the expenses between deductible business expenses and non-deductible personal expenses in proportion to the number of days you spent on nonbusiness activities during your trip, unless you meet one of the certain conditions.
Foreign travel solely for business is fully deductible. Foreign travel expenses are fully deductible if you spent 100 percent of your time abroad on business. However, if you engaged in any non-business activity, whether sightseeing or visiting old friend, you may have to make an allocation between deductible business expenses and non-deductible personal ones.
Time spent for personal purposes may trigger allocation. If you spend part of your time in a foreign country engaging in personal activities, you may have to allocate your travel expenses in proportion to the number of days you spent on nonbusiness activities during your trip, unless you meet one of the following conditions:
- Less than one week outside the US. You were outside the U.S. for a week or less, combining business and personal activities (a week is seven consecutive days - not counting the day you leave the U.S., but counting the day you return to the U.S.).
- Less than 25 percent of time on personal activities.You were outside the U.S. for more than a week, but you spent less than 25 percent of the total time you were in a foreign country on personal activities (counting both the day your trip began and the day it ended).
- Vacation was not a consideration. You can establish that a personal vacation was not a major consideration.
If you meet one or more of these conditions, your trip is considered to be entirely for business. This means you can deduct all of your business-related travel expenses.
Allocation required when personal time exceeds 25 percent
If you don't meet at least one of the conditions set forth above and you spent 25 percent or more of your time on personal activities, you'll have to allocate your travel expenses of getting to and from your destination between your business and personal activities to determine your deductible amount. You must allocate your expenses for foreign travel even if your trip was primarily for business reasons.
Vacations are never deductible. However, if your trip was primarily for vacation purposes, the entire cost of the trip is a nondeductible personal expense. However, if you do conduct incidental business, you can can deduct expenses that you incurred on the trip that were directly related to your business.
Convention expenses may be deductible
You can deduct your travel expenses (including travel, lodging, and meals for yourself) when you attend a convention within the United States if you can show that attending the convention benefits your business. These rules apply to workshops, conferences and seminars, as well as actual conventions.
You can satisfy the business relationship test by showing that your business duties and responsibilities tie in to the program or agenda of the convention. The agenda doesn't necessarily have to deal specifically with your duties or responsibilities - a tie-in is enough. You must, however, show some kind of income-producing purpose for attending the convention. In any case, you won't be able to deduct any nonbusiness expenses (sightseeing, for example) you incur while attending the convention.
Example: Caroline, an interior designer, attends the Window Covering Association of America trade show in Kentucky. She returned with renewed enthusiasm for her profession and with knowledge regarding several new vendors. Caroline can deduct her expenses because attending the show benefits her business.
The rules become far stricter when the convention is held outside North America or on a cruise ship. Basically, the IRS doesn't want people deducting their vacations. However, they recognize that at least some of these trips are for bona fide business purposes. Here's what you need to know:
Conventions held outside North America.
In order to be able to deduct expenses for attending a convention outside the North American area, the convention must be directly related to your business and it must be as reasonable to hold the convention outside North America as in it. For example, it would be reasonable to hold the convention outside North America if many of the convention's attendees lived overseas. You must also satisfy the requirements for deducting business travel expenses outside the U.S..
However, there is a way to enjoy an exotic locale without triggering the foreign convention rules: be aware of what countries are considered within the "North American area." For purposes of convention travel, a North American area" includes the obvious: the United States, its possessions, the Trust Territory of the Pacific Islands, Canada and Mexico. However, it also includes countries that have an information agreement in place with the United States and that might certain tax law requirements.
The IRS maintains a list of these countries, many of which are tourist meccas that you might not think of as North American. They include:
|Antigua and Barbuda||Aruba||Bahamas|
|Marshall Islands, Republic of
||Micronesia, Federated States||Netherlands Antilles|
|Palau, Republic of||Panama||Trinidad and Tobago|
Conventions held on cruise ships. The following requirements must be met before you can deduct expenses incurred for a convention or seminar held on a cruise ship:
- The convention must be directly related to the active conduct of your business.
- The cruise ship must be a vessel registered in the U.S.
- All of the cruise ship's ports of call must be located in the U.S.(or its possessions).
- You must attach to your income tax return a written statement signed by you that includes the total days of the trip (excluding the days you spent traveling to and from the ship's port), the number of hours each day that you devoted to scheduled business activities, and a program of the scheduled business activities of the meeting.
- You must attach to your income tax return a written statement signed by an officer of the organization or group sponsoring the convention that includes a schedule of the business activities of each day of the convention, and the number of hours you attended the scheduled business activities.
If you meet the requirements, you can deduct up to $2,000 annually of the expense of attending a seminar or convention on a cruise ship. In the case of a joint return, a maximum of $4,000 would be deductible if each spouse attended qualifying cruise ship conventions.