One of my favorite movies about business travel is the Steve Martin/John Candy classic: Planes, Trains and Automobiles. The film might not teach you much about the tax perks of traveling for business, but it will make even the most nightmarish travel debacle seem tame compared to the film’s stolen cabs, canceled flights, burglarized motel rooms, burning rental cars and incompetent travel companions.
Hopefully, your business travel plans aren’t quite so recklessly eventful. Before you go, check out the ins and outs of tax deductions when traveling for business—so you avoid a Planes, Trains and Automobiles-like experience altogether.
Travel Tax Perks #1: Meals and Lodging
To be eligible for a deduction for the cost of meals and lodging when traveling for business, your work duties must require you to be away from home for a period substantially longer than a day’s work. In other words, a stay-over is necessary.
If you travel to a neighboring town (an hour away) and work a nine-hour day, your meals there are not deductible because your job did not require an overnight stay. However, if you attend a three-day work conference in another state, your hotel room and all meals there are considered deductible business expenses.
The deduction for business meals is generally limited to 50% of the cost of the meal. The IRS does not look favorably on meals that are “lavish or extravagant.” However, they don’t provide clear guidelines on what is considered lavish or extravagant. Expenses aren’t disallowed merely because they are more than a fixed dollar amount or take place at fancy restaurants. It is based on the facts and circumstances.
A freelance writer attending a conference in New York City may have a hard time getting away with deducting lobster and a bottle of Dom Perignon at Jean Georges. However, a luxury real estate broker may take clients to dinner at Jean Georges on a regular basis. Lavish or extravagant is relative.
As an alternative to keeping records of your actual meal costs, you can use the “standard meal allowance” method. This is a set amount for your daily meals and incidental expenses. The set amount varies depending on where and when you travel. You can look up the per diem rate for each major city and locality at the US General Services Administration website.
Travel Tax Perks #2: Transportation
You can deduct the cost of travel by airplane, train, bus or car between your home and your business destination. You can also deduct the cost of a taxi, Uber or other similar transportation methods between the airport, hotel and work location.
If you purchased your airline ticket using frequent flyer miles and paid nothing out of pocket, your deduction is zero.
If you drive your own vehicle for the trip, you can deduct actual expenses or the standard mileage rate. Any business-related tolls and parking can be deducted as well. If you rent a car for the journey, you can deduct only the business portion of the expenses.
You can also deduct “incidental expenses” such as the fees or tips for porters, baggage carriers, hotel staff, etc. In addition to the travel, lodging and meal expenses discussed above, the incidental costs incurred on a deductible trip such as laundry, dry cleaning, phone calls (and so on) are fully deductible.
Travel Tax Perks #3: The Fine Line Between Trips for “Business” and “Pleasure”
Many people choose to extend a business trip by a few days for a personal vacation. In this case, you can deduct only your business-related travel expenses. As long as the trip was primarily for business travel, you can deduct 100% of the round-trip transportation costs. After all, those costs would likely be the same whether you stay there two days or ten days.
You can also deduct 100% of the cost of lodging and 50% of your meals for the days you are there on business. So if you take a five-day trip to San Francisco and three of those days are for business and two for vacation, you can deduct only the meals and lodging for the three business days.
If you’re planning a vacation to Hawaii, can you meet with a client there and deduct all of your travel costs as a business trip? Unfortunately, no. If the trip was primarily for personal reasons, then the entire cost of the trip is a nondeductible personal expense. You can only deduct any expenses directly related to your business, such as cab fare to a client’s office or a business meal.
Travel Tax Perks #4: Traveling with Your Spouse
Taking your spouse along for the trip? Generally, deductions are denied for travel expenses paid or incurred for a spouse, dependent or employee of the taxpayer who accompanies the taxpayer on the business trip, unless the:
- Spouse or dependent is an employee of the taxpayer.
- Travel of the spouse, dependent or employee is for a bona fide business purpose.
- Expenses would otherwise be deductible by the spouse, dependent or employee.
The law allows a deduction for the single rate for lodging. Usually, there is no difference in the room rate for one or two occupants, so the entire lodging expense for your spouse will be deductible. When traveling by car, the law does not require any allocation because the spouse is also riding in the vehicle.
So if you were traveling by car, the entire cost of the transportation would be deductible. That would generally also apply to taxis at the destination. The only substantial cost that is not allowed is the cost of the spouse’s meals, which, even if they were deductible, would be reduced by the 50% rule. If you were traveling by plane, train or automobile, the cost of the spouse’s tickets also would not be deductible.
How to Keep Record of Business Travel
The IRS requires that all travel expenses be substantiated by records or other evidence. Acceptable records include diaries, logs, receipts, paid bills and expense reports. The records should disclose the amount, date, place and essential character of the expense.
Lodging expenses must be substantiated with actual, detailed receipts. If your lodging expenses include other items, such as room service or dining costs charged to a hotel room, those must be separately identified, since meals have the 50% limitation as noted above. Other room charges—such as mini bar charges and movie rentals—are nondeductible personal expenses.
If you use the standard meal allowance for deducting meals, you must still maintain records proving the time, place and business purpose of your travel.
- Keep good records of travel expenses.
- Maintain the records on a regular basis, i.e. complete diary and log notations close to the time the expense is incurred, so you avoid backtracking.
- Document the business purpose and the expected business benefit.
- Retain your travel itinerary to document the business activity while away.
- When you take a client out for a meal, make a note of the business you discussed during the dinner. This documentation will be essential if you are ever audited.
- Travel expenses are deductible only if the individual is away from his or her “tax home”—usually considered to be your regular place of business—for more than one business day.
While tax deductions are often complex and confusing, having a better understanding of the rules and limitations will help you run your business more efficiently and allow you to make better financial decisions. Take some time before your trip to do your research or work with an experienced professional. This ensures you’re not missing out or misunderstanding your business expenses and potential tax deductions or credits.
This is an archived post from the FreshBooks Blog and was originally published on March 2012.
Janet Berry-Johnson is a CPA and a freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Parachute by Mapquest, Capitalist Review, Guyvorce, BonBon Break and Kard Talk. Janet lives in Arizona with her husband and son and their rescue dog, Dexter. Outside of work and family time, she enjoys cooking, reading historical fiction, and binge-watching Real Housewives.