As a business owner, travel may be essential for meeting clients, attending industry conferences, managing vendors, and much more. Understanding which travel expenses qualify as tax deductions can make a big impact on your business’s finances. By keeping careful records and knowing what’s deductible, you can ensure tax compliance and maximize savings on business travel.
What is Your Tax Home?
Eligible business travelers can deduct necessary and ordinary expenses incurred while traveling away from their “tax home.” In tax terms, “ordinary” means common in your industry, while “necessary” means beneficial and appropriate for your business. Personal, lavish, or extravagant expenses aren’t deductible. However, reasonable expenses like a first-class flight or luxury hotel stay may qualify as long as they align with business needs.
Your tax home is not necessarily where you live; rather, it’s the area around your main place of business. (Special rules apply if you have multiple business locations or don’t have a regular workplace.) Generally, you’re considered “away from home” if you’re away longer than a typical workday and need to rest to meet work requirements. Temporary assignments qualify, but expenses for indefinite assignments lasting over a year are not deductible.
Common Deductible Travel Expenses
If you meet the requirements for deductible travel, here are common expenses that may qualify:
- Transportation: Airfare, train, or bus tickets, along with baggage fees.
- Car Rentals or Mileage: Rental fees or the cost of using your own vehicle, plus tolls and parking fees.
- Local Transportation: Taxis, rideshares, and other transport while at your destination for business purposes.
- Lodging Costs: Hotel expenses while away on business.
- Tips and Incidentals: Tips for service staff, laundry, and dry cleaning.
- Meals: Generally, meals are 50% deductible, including solo meals and meals with clients if they serve a business purpose and aren’t extravagant.
Claiming Travel Deductions
If you’re self-employed, business travel expenses can be deducted on Schedule C. Employees, however, cannot deduct unreimbursed business travel expenses. Employers can deduct employees’ travel expenses if they provide advances, reimbursements, or pay directly under an “accountable plan.” This plan requires that expenses serve a business purpose and that employees substantiate expenses and return any excess funds.
Combining Business with Personal Travel
If a U.S. trip is primarily for business but includes personal days, you can still deduct the full cost of transportation to and from the destination. However, lodging and meal deductions apply only to the business days. To classify a trip as business, the majority of the time must be spent on business activities.
Recordkeeping Requirements
To deduct travel expenses, maintain adequate documentation, such as receipts and detailed records, noting the amount, date, location, and purpose of each expense. For non-lodging expenses under $75, receipts aren’t mandatory, but details must still be logged. Some employers may have stricter substantiation policies than the IRS requires.
If using your car for business travel, you may deduct either actual expenses or the standard mileage rate. For lodging, meals, and incidental expenses, employers can also use the per-diem method, which allows simplified record-keeping based on federal per-diem rates. Self-employed individuals can use this method for M&IE but not for lodging.
Alternatively, the optional high-low substantiation method allows using set per-diem rates for high-cost and other localities.
Need Help Navigating Business Travel Deductions?
Business travel tax rules can be complex, especially when considering international travel or traveling with family members. If you have questions or need assistance in managing these deductions, reach out to us for guidance to ensure you’re maximizing your tax savings.
Q&A below:
What is considered a “tax home” for travel deduction purposes?
A tax home generally refers to the city or general area where your principal place of business is located, not necessarily where you maintain your family residence. You’re considered to be traveling away from your tax home if your work duties require you to be away for substantially longer than an ordinary workday and you need rest to perform those duties. However, travel expenses aren’t deductible if you’re on an indefinite assignment expected to last more than a year.
What types of expenses can I deduct for business travel?
Common deductible business travel expenses include airfare, train or bus fare to your destination, car rentals or the cost of using your vehicle (plus tolls and parking), transportation at your destination, lodging, tips to service workers, and dry cleaning or laundry. Meals, including those eaten alone or with business contacts, are generally 50% deductible if they’re for a business purpose and not extravagant.
Can I deduct travel costs if I mix business and personal activities on a trip?
Yes, you can deduct the full cost of transportation to and from the destination if the trip is primarily for business. However, only the expenses directly related to the business portion of the trip, such as lodging and meals, are deductible. For the trip to qualify as primarily business-related, you generally need to spend more time on business activities than personal ones.
What documentation is needed to claim business travel deductions?
To claim travel deductions, you must substantiate each expense with adequate records, including receipts, canceled checks, or bills that show the amount, date, place, and nature of each expense. Non-lodging expenses under $75 don’t require a receipt, but they must still be documented in an expense report. Employers may choose to simplify tracking by using federal per-diem rates for meals and incidental expenses or the high-low substantiation method.
