Business trips are vital to the modern professional landscape, but managing travel expenses can feel like a constant battle.
Did you know that the average U.S. business trip in 2023 cost a staggering $1,293, with daily expenses reaching $325? Unsurprisingly, business travel is also the second-largest cost factor for most businesses.
For both employees and employers, streamlining business travel expense management and reimbursements becomes a top priority. This guide will equip you with all the necessary information: what qualifies as a travel expense, what you can claim as tax deductions, and, most importantly, how to manage it efficiently.
Let’s take the stress out of travel expenses and get you back to focusing on what matters most–a successful business trip.
What Is A Travel Expense?
For tax purposes, a travel expense is any cost you incur while traveling for work. This can include transportation, lodging, meals, and incidental costs directly related to your business trip.
When does travel qualify as a business trip?
The IRS considers a trip a business trip if it takes you away from your tax home or main place of work for business reasons and requires you to sleep over for work purposes.
Quick definitions
Tax home: Your tax home isn't where you live with your family but rather the general area where you report to work every day. This applies to your whole city or the surrounding region where your job is located.
Main place of work:
To identify your main work location if you have multiple workplaces, consider these factors:
- The amount of time you typically spend at each location. The place where you log the most hours might be the frontrunner.
- The intensity of your work activities at each location. Where do you take on the most crucial tasks and responsibilities?
- The relative importance of your income from each location. Does one location bring in significantly more income than the others?
For more information, refer to IRS Publication 463 (2023), Travel, Gift, and Car Expenses.
A List Of Deductible Travel Expenses
Businesses can claim tax deductions when employees travel outside their main place of work. These expenses must be ordinary and necessary to travel away from home for business purposes. You cannot deduct expenses that are lavish, personal, or unrelated to work. Employers can also deduct costs associated with temporary work assignments lasting less than a year.
Here’s a list of deductible business travel expenses while you’re away from home:
- Transportation ✈️: Flights, trains, buses, or your own car to get to your business destination (including free frequent flyer tickets at face value).
- Local travel 🚕: Taxis, shuttles, or rideshares between airports/stations, hotels, and work locations (clients, meetings, temporary assignments).
- Shipping 🛄: Baggage, samples, and display materials between your regular and temporary workplaces.
- Car expenses 🚗: Using your car (actual expenses or mileage rate), tolls, parking (business use only for rentals).
- Accommodation 🏨: Lodging for your business stay.
- Meals 🍽️ : Food that's not for entertainment purposes.some text
- Instead of tracking every meal expense, you can use a standard meal allowance that changes based on your travel destination. However, remember that only 50% of the cost (even using the standard allowance) is typically deductible for business meals.
- Laundry and dry cleaning 🧺: Keeping your clothes presentable during the trip.
- Business communication📱: Calls, faxes, or other work-related messages.
- Tips💰: Associated with any of the deductible expenses.
- Other miscellaneous costs 💸: As long as they're reasonable and necessary for your business trip, like travel to/from business meals, stenographer fees, computer rentals, or maintaining a work trailer.
And What You Can't Deduct As Travel Expenses
You can only claim expenses that are ordinary and necessary for your business trip. This means no personal expenses like buying gifts, extravagant meals, fines incurred, or even expenses made for companions like a friend or family member who might have accompanied you on the trip.
Can You Bring Friends And Family On A Business Trip?
Do you feel like taking your friends or your spouse on a business trip? While you can’t deduct the expenses of bringing your family on the trip, some costs can be offset indirectly.
Carpooling on a business trip
- Need a ride? No problem! If you're traveling for business and renting a car is a legitimate expense, you can still deduct your mileage or car rental costs even if you offer rides to others.
- But be careful! You can't deduct extra expenses caused by carpooling, like the need for a bigger car to fit your family. The key is that the expense must be "ordinary and necessary" for your business trip.
Sharing a hotel room
- Similar to carpooling, you can only deduct the cost of lodging you would typically use for a solo business trip.
- However, there's some wiggle room! If you pay for a bigger room to accommodate your family, you can still deduct the portion a single room would cost.
So, What If I Extend My Trip For a Vacation?
Great idea! But remember, you can only deduct business travel expenses. This covers getting you to and from your work location, plus any work-related costs while you're there. Personal detours or leisure activities won't count.
Example: Imagine you take a business trip to Seattle from your usual grounds in Chicago. The round-trip mileage for that work travel clocks in at 2,200. But on the way back, you take a quick detour to catch up with your family in Portland. Over your 10-day trip (including the detour), your travel, meals (excluding entertainment), lodging, and other expenses add up to $3,400.
Now, if you'd skipped Portland and flown straight back, the trip would've been 8 days and cost $2,800. The good news? You can still deduct the full $2,800 for your business trip, including the round-trip flights to and from Seattle.
Some Methods of Reimbursing Travel Expenses
Per-diem
Per-diems simplify expense reimbursements by providing a fixed daily rate for meals and incidental expenses during travel. The rate varies depending on location and reflects typical costs.
Employees don’t need to submit receipts for these covered expenses; they just need to document their travel dates and locations. This saves time but requires setting appropriate per diem rates and ensuring employees understand what’s included.
Also Read
Corporate Credit Card
Companies issue corporate credit cards specifically for business travel. Employees use these cards for approved expenses, eliminating the need for upfront personal costs. The company handles the bill directly, and employees submit expense reports for record-keeping. This offers convenience but requires clear spending policies and monitoring.
Post-trip Expense Reimbursements
Sometimes, accurately predicting all business travel expenses upfront can be tricky. Unexpected expenses like laundry, repairs, or tolls can throw off the estimate.
To address this, you can reimburse employees for documented expenses after their trip. Traditionally, this involves manually entering expenses on a spreadsheet and submitting receipts for verification.
But did you know there’s a faster and much easier way to do this?
Travel expense management software like Fyle use Conversational AI, which enables employees to submit receipts via text messages for out-of-pocket and credit card expenses. Expense reports are automatically created by extracting all relevant information from receipts, and card expenses are automatically reconciled with the correct card transaction when the data flows in.
This makes the reimbursement process faster, more efficient, and ultimately more convenient for employees.
How To Manage Travel Expenses?
Automate with a Travel Expense Management Software
This is one of the easiest ways to manage business travel expenses. Invest in a travel expense management software that automates receipt collection, approval workflows, and your expense reimbursement process.
It enables employees to submit receipts on the go and leaves little room for manual errors. Additionally, with real-time compliance, your approvers will know if expenses do not align with company policies and can take necessary action. This saves time and reduces errors for both employees and approvers alike.
Establish Clear Travel Policies
Having clear and well-communicated travel policies helps employees understand what expenses are reimbursable and set spending limits. This can include guidelines for meals, accommodation, and incidentals. Specifying preferred vendors or booking platforms can also help control costs.
Issue Virtual Cards to Your Employees
Do you use an Amex Business Credit Card? With travel expense management software like Fyle, you can create American Express virtual cards on the spot, perfect for one-time or regular costs like meals, travel, or office supplies.
This eliminates the need for physical cards and simplifies expense tracking for traveling employees. Plus, you can monitor spending in real time, giving you greater control over your budget.
How To Calculate Travel Expenses?
Calculating business travel expenses involves two main steps: estimating the costs before the trip and then reconciling the actual expenses after the trip. Here’s a breakdown:
Before the trip
1. Research average costs
- Use online travel booking tools and resources to understand your destination's average flight fares, hotel rates, and meal prices.
- Consider factors like travel seasonality and location when researching.
2. Consider additional expenses
- Factor in potential costs like local transportation (taxis, buses), laundry, internet access, and business calls made during the trip.
3. Utilize corporate travel tools
- Companies often have negotiated discounted rates with hotels, airlines, and car rentals. You could leverage folks in your network for the best deals.
4. Set realistic budgets
- Based on your research and additional expenses, set a realistic budget for each category (transportation, accommodation, meals).
- This will ensure you stay on track during the trip.
After the trip
1. Collect and categorize receipts
- Keep all receipts for flights, hotels, meals, and other business-related expenses incurred during the trip.
- Categorize expenses as per your expense policy (e.g., transportation, accommodation, meals)
2. Reconcile expenses with estimates
- Compare your actual spending against the pre-trip estimates you made.
- Identify areas where you might have overspent or underspent.
3. Use a travel expense management software
- Consider using a travel expense management system to automate receipt management, expense categorization, expense reporting, and reimbursements.
- This can save you a significant amount of time and effort in the reconciliation process.
Additional tips
- Get pre-approval for high-cost items: If you anticipate any large expenses (e.g., expensive client dinners), seek pre-approval from your manager to avoid any issues with reimbursements.
- Use travel rewards programs: Take advantage of travel rewards programs offered by airlines, hotels, and credit card companies to earn points or miles that can be redeemed for future travel.
How Can Businesses Reduce Travel Expenses?
Leverage Technology
- Video conferencing: Whenever possible, use video conferencing platforms like Zoom or Google Meet for meetings. This eliminates travel costs and saves employees time.
- Travel booking tools: Implement online booking tools that offer negotiated corporate rates for flights, hotels, and car rentals.
Implement a Clear Travel Policy
- Define trip approval criteria: Establish clear guidelines for what qualifies as a business trip and who can approve travel requests.
- Set expense limits: Based on the destination and travel duration, set reasonable spending limits for different expense categories (e.g., meals and accommodation).
- Promote alternative travel options: Encourage employees to consider cost-effective travel options like economy-class flights or budget-friendly hotels when appropriate.
Negotiation and Cost Optimization
- Negotiate bulk rates: For frequent business travelers, negotiate discounted rates with airlines, hotels, and car rental companies.
- Utilize travel management companies (TMCs): Partner with a TMC specializing in sourcing cost-effective business travel solutions.
- Encourage early booking: Promote early booking of flights and hotels to take advantage of lower fares and rates.
Analyze and Optimize Travel Data
- Track travel spending: Track and analyze business travel expenses to identify areas for cost reduction. Look at trends and identify destinations with higher-than-average costs.
- Review travel policies regularly: Review your travel policies regularly and adjust them based on updated data and changing business needs.
- Benchmark against industry standards: Compare your business travel spending with industry benchmarks to identify areas for improvement.
What Penalties Will I Face For Breaking IRS Rules?
The IRS takes tax compliance seriously, and there can be penalties for claiming non-deductible expenses on your business travel report. Here’s a breakdown of what you might face:
Owed-back taxes
If the IRS discovers you claimed non-deductible expenses, you’ll be responsible for paying back the taxes you avoided plus interest. This interest accrues from the date the tax was originally due.
Tax-penalities
The penalties you face will depend on whether the mistake was intentional or unintentional.
- Negligence: If the mistake was unintentional due to negligence (not properly understanding the rules), you may face a penalty of 20% of the additional tax owed.
- Fraud: If the IRS determines the mistake was intentional fraud, you could face a steeper penalty of 75% of the additional tax owed, plus potential criminal charges.
For more information, please refer to the IRS documentation on penalties.
Additional filing requirements
In some cases, the IRS may require you to file additional forms, such as Form 8275, to disclose the error and potentially avoid penalties.
How Form 8275 Can Help You Avoid Tax Penalties
The Form 8275 lets you explain any deductions you claimed that might not be perfectly clear on your tax return. As long as you had a good reason for claiming the deduction (which wasn't something the IRS specifically disallows), filing Form 8275 can help you avoid owing extra taxes or facing penalties. However, it's important to note that this form won't work if you intentionally tried to mislead the IRS.
For more information, please refer to Instructions for Form 8275 (01/2021)
How Fyle Can Help Manage Business Travel Expenses
Fyle streamlines expense reporting from start to finish. Thanks to Conversational AI, you can submit receipts with a simple text message, and Fyle's integrations with Visa, Mastercard, and American Express give you real-time notifications on all card spending while also automatically reconciling credit card transactions.
Fyle goes beyond automation, offering features like business mileage tracking and the ability to issue Amex virtual cards specifically for travel expenses. Plus, real-time compliance checks keep your spending on track. This comprehensive approach helps you identify cost-saving opportunities and ensures your business stays within budget.
See how Fyle transforms your travel expense management. Sign up for a demo today!
