Business travel expense deductions are the ordinary and necessary expenses incurred when you travel for business purposes. “Business travel” is a specific term determined by the Internal Revenue Service (IRS) used to describe travel away from your tax home, and such trips need to be “substantially longer than an ordinary’s day’s work,” require you to sleep away from home, and be work-related.
Business travel expenses are one of the most common deductions, but the whole process can be confusing and tedious. Even worse, failing to indicate these deductions properly can cause you numerous issues like losing out on potential deductible business expenses, an IRS tax audit, or tax problems that can end up costing you a lot of money.
What Business Travel Expenses are Tax Deductible?
When you examine your business travel, there are quite a few items you can deduct as an expense. Here’s a quick overview of some of the items you can claim and how to know if it’s an appropriate deduction.
Ordinary And Necessary Expenses Related to Travel
Travel expenses qualify as necessary and ordinary if they are accepted, common, helpful, and appropriate for your business. In truth, these expenses do not have to be indispensable to be necessary. Instead, they just need to help your business. These expenses can include:
- Cars for Travel
This includes car expenses related to maintaining the vehicle, such as gas, oil, repairs, washing, tolls, car rental fees, and parking fees.
You can deduct expenses for lodging while you are away from home on a business assignment. In these situations, you can submit actual costs or use per diem rates.
- Business Meals
If a meal is an ordinary and necessary expense, and not lavish under the circumstances, it can be deducted — at least up to a certain amount.
When it comes to meals, it is critical to add that IRS guidelines indicate that you can only deduct 50% of the cost of the meal when you are traveling.
Travel Expenses Directly Related to Your Business Purposes
Travel expenses must be directly related to your business to be deductible.
This means that pleasure trips are never deductible, but claimable work travel expenses can include:
- Travel costs including rail, airfare, and bus fare expenses
- Baggage charges
- Transportation costs such as taxi fares or other expenses to get you between the airport and a hotel, to business meetings, or from one business destination to another.
- Dry cleaning and laundry expenses
Remember, you cannot deduct purely personal expenses and indicate them as business costs. Purchasing something on a trip for a personal purpose is not deductible, but if the item is for personal and business reasons, you can deduct the business portion of the expense.
Reasonable Travel Expenses You Incurred
In general, there is no limit to how much you can deduct as long as the tax deductions are not more than you spend and are reasonable. However, travel, meal expenses, and entertainment activities are often heavily scrutinized by the IRS. It will not allow such expenses if they consider them to be lavish.
Yet, depending on your business. Reasonable business travel deductions can even include the following:
- Trade Shows and Conventions
If the convention is directly related to your business, such as having a sales booth at the convention, you can deduct these expenses.
- Cruise Ships
Even if cruise ship travel is directly associated with a business purpose, you can only deduct a total of $2,000 for the trip costs. Additionally, you need to provide specific documentation showing how the cruise activities were related to your business.
It is important to note that if the amount of the deduction is substantially large relative to your income, the chance of getting audited goes up significantly.
How to Claim Business Travel Expense Deductions on Your Tax Return
The most critical part of deducting travel expenses is to save all your receipts. This does not mean a credit card statement, but rather you need to show separate receipts indicating the date, expense details, amount spent, and an explanation of how the trip is related to business.
You will document these expenses on your income tax return in the following manner:
- If you are a single-member limited liability company (LLC) or self-employed, you will indicate these expenses in the “Expenses” section of Schedule C.
- If you are a multiple-member LLC or a partnership, you will indicate these expenses in the “Deductions” section of Form 1065.
- If you are a corporation, you will show these expenses in the “Deductions” section of Form 1120.
Business travel expense deductions are incredibly advantageous to taxpayers, but they are often complex. It is in your best interest to speak with a tax professional who can help you understand all these expenses and decide which are tax-deductible.
The Business Travel Expenses You Can’t Claim
The rules here are relatively simple:
- You cannot deduct travel expenses when they are extravagant or lavish.
- These business expenses must be reasonable, considering the circumstances.
- The IRS is often on the lookout for taxpayers who classify a nondeductible personal trip as a deductible business trip.
- For these reasons, it is important to gauge what the primary purpose of the trip is.
For example, if you travel to New York to go sightseeing, but you also meet two clients for lunch to discuss business contracts, you cannot deduct the cost of the trip. However, you could deduct a portion of the lunch costs.
Other expenses you cannot deduct include:
- Entertainment expenses that are not business-related
- Expenses involving friends or dependents traveling with you
- Travel expenses you were reimbursement for
- Personal vacations.
Sometimes your business travel expense deductions can land you in hot water. In the event of an audit, you need to keep accurate records of your business costs, related expenses, and any incidental expenses. This evidence will be more likely to get accepted and validated by the IRS. It is also recommended you seek input from tax professionals who can assist you through the audit process.
Need Help Calculating Business Expenses? Ask the Experts.
Taking advantage of business travel expense deductions can be a significant tax write-off for your business, but the key to maximizing the process is working with a professional tax team who can help you figure out which activities are deductible. If you have any business travel expense deduction questions, contact Silver Tax Group today and speak with an expert.