During the COVID-19 pandemic, business travel nearly came to a halt. Today, it’s on the rebound, as “Zoom-fatigued” executives craving face-to-face interaction hit the road again. With more people getting out of their offices, now is a good time for a refresher on the tax deductibility of business travel expenses.

What’s your tax home?

Taxpayers are permitted to deduct their ordinary and necessary expenses of business-related travel away from their “tax home.” “Ordinary” means common and accepted in the taxpayer’s industry. “Necessary” means helpful and appropriate for the business. Expenses aren’t deductible if they’re for personal purposes, or if they’re lavish or extravagant. That doesn’t mean you can’t fly first class or stay in luxury hotels, but you’ll need to show that the expense was reasonable under the circumstances.

Your tax home isn’t necessarily the place where you maintain your family home. Rather, it refers to the city or general area where your main place of business is located. Suppose, for example, that Walter lives in Philadelphia but works in New York City five days a week, returning to Philadelphia on the weekends. Walter’s tax home is New York, so his expenses for traveling there aren’t deductible. And while travel to Philadelphia on the weekends is away from his tax home, those trips are for personal reasons, so those expenses also aren’t deductible. Special rules apply to taxpayers who have several places of business or who have no regular place of business (for example, consultants who are always on the road).

Generally, you’re considered to be traveling away from home if your duties require you to be away from your tax home for substantially longer than an ordinary day’s work and you need to get sleep or rest to meet work demands while away. This includes temporary work assignments. However, you aren’t permitted to deduct travel expenses in connection with an indefinite work assignment (that is, more than a year) or one that’s realistically expected to last more than a year.

What’s deductible?

Assuming these requirements are met, commonly deductible travel expenses include (but aren’t limited to):

• Air, train or bus fare to the business destination, plus baggage fees,
• Car rental expenses or the cost of using your own vehicle, plus tolls and parking,
• Transportation while at the business destination, such as taxis or ride shares between the airport and hotel and to and from work locations,
• Lodging and meals,
• Tips paid to hotel or restaurant workers, and
• Dry cleaning and laundry service.

Meal expenses are generally 50% deductible. This includes meals eaten alone while traveling for business. It also includes meals with others, if the meals are provided to a business contact, serve an ordinary and necessary business purpose, and aren’t lavish or extravagant.

Who can claim the deduction?

Self-employed people may deduct travel expenses on Schedule C. But employees currently aren’t permitted to deduct unreimbursed business expenses, including travel expenses.

However, businesses may deduct employees’ travel expenses to the extent that they provide advances or reimbursements to employees or pay the expenses directly. Advances or reimbursements are excluded from wages (and, therefore, aren’t subject to income or payroll taxes) if they’re made according to an “accountable plan.” In this case, the expenses must have a business purpose, and employees must substantiate their expenses and pay back any excess advances or reimbursements within a reasonable time.

What records should you keep?

To deduct business travel expenses, you must substantiate them with adequate records — typically, receipts, canceled checks or bills — that show the amount, date, place and nature of each expense. Receipts aren’t required for nonlodging expenses less than $75, though these expenses must still be documented in an expense report.

Keep in mind that an employer may have its own substantiation policies that are stricter than the IRS requirements. If you use your own car or a company car for business travel, you can deduct your actual costs or the standard mileage rate.

For lodging and meal and incidental expenses (M&IE) — such as small fees or tips — employers can use the alternative per-diem method to simplify expense tracking. Self-employed individuals can use this method for M&IE, but not for lodging.

Under this method, taxpayers use the federal lodging and M&IE per-diem rates for the travel destination to determine reimbursement or deduction amounts. This avoids the need to keep receipts to substantiate the actual cost. However, it’s still necessary to document the time, place and nature of the expense.

To make things even simpler, the optional high-low substantiation method allows a taxpayer to use two per-diem rates for all business travel: One for designated high-cost localities and a lower rate for all other localities. Currently, those rates are $309 and $214, respectively, and the M&IE-only rates are $74 and $64, respectively.

Turn to your advisor

The rules regarding business travel deductions can be complicated. In addition to the rules explained above, there are special rules for international travel and travel with your spouse or other family members. If you’re uncertain about the tax treatment of your travel expenses, contact your financial advisor.

Mixing business and pleasure

If you take a business trip in the United States primarily for business, but also take some time for personal activities, you’re still permitted to deduct the full cost of airfare or other transportation to and from your destination. However, other expenses, including lodging and meals, are deductible for only the business portion of your trip.

Generally, a trip is primarily for business if you spend more time on business activities than on personal activities. For example, you might travel to Las Vegas for a week, attend a trade show for five days and spend the weekend gambling or going to shows.

What if a trip is primarily for pleasure, but you conduct some business while you’re there? In that case, your travel expenses are nondeductible. However, you may write off otherwise deductible expenses for business activities during your trip.

© 2024