Have to travel often for work? Business travelers and business owners are often required to always stay on the move to close business deals and attend client meetings. These travel costs add up very quickly!
What’s worse? They often go unnoticed.
Fortunately, you can deduct many of your business travel expenses on your taxes. The Internal Revenue Service (IRS) has a specific definition for business travel. This helps in determining whether you can deduct these travel expenses for business purposes. Staying aware of these rules can help you not only plan better but also save your resources.
In this blog post, we explore a few of these rules and regulations with business traveler Kelly!
Kelly is a senior sales professional at a mid-sized company. Her business has multiple offices, all based in the USA but her work often takes her abroad. In addition to that, Kelly likes to attend relevant industry events that add to her knowledge and help her network better. Since travel is a massive chunk of her business expenses, she wants to know how much of that expense can be claimed as a business expense.
Does her next trip qualify as a business trip according to the IRS?
Kelly’s trip must meet all of these criteria to be considered “business travel”:
- Location of travel: She is traveling away from her tax home
- Duration of travel:
- The trip is substantially longer than an ordinary day’s work.
- It requires her to sleep or rest while away from home.
- The trip is less than one year long.
- Purpose of travel: Business is the primary reason for the trip.
- Expenses during travel: Neither should the expenses be lavish nor for personal purposes.
While most rules seem general, there are a few lesser known rules about tax deductible for business travel expenses.
Here are some best practices to keep in mind the next time you are on a business trip:
- Kelly paid for flights or hotels using reward points, so they are not deductible.
- When Kelly extends her business trip for personal reasons, the expenses of the extra days cannot be claimed as a part of the business expenses.
- When her trip is primarily personal in nature, none of the traveling expenses are deductible.
- Business calls and data charges while on-the-go can be claimed as business expenses.
- When she uses her own car during the trip, she can deduct the standard mileage rate, as well as tolls and parking fees.
- The deduction for business meals is generally limited to 50% of the cost.
- She is a member of the National Guard or military reserve, so she can claim a deduction for unreimbursed travel expenses paid in connection with the performance of services. (The trip expenses are deductible only if this travel is overnight and more than 100 miles from her home. All expenses must be ordinary and necessary.)
- Kelly is a big tipper. As long as the tip she paid is part of the payable amount mentioned in the receipt, the tip amount can be claimed as a business expense as well.
- Kelly works out of different offices spread across the country. For taxes, her “tax home” is the general area/city where her main office is located. It could either be where she spends most of her time or where most of her important meetings take place. All travel will be considered to and from this tax home, and hence, it is crucial to identify it.
- Kelly knows she can’t deduct travel expenses paid in connection with an indefinite work assignment. Any work assignment over one year is considered “indefinite.”
- Kelly likes to attend events and conventions. She travels for the good ones frequently. The expenses are only deductible if Kelly can show that her attendance benefits the business.
- Kelly knows any charges for extra baggage, and packing fee can be included as a business expense.
- Sometimes Kelly’s husband Peter tags along with her on business trips. Peter’s expenses are not deductible because Peter is not an employee of the business and is not traveling for business purposes.
- When Kelly’s work takes her abroad, all travel expenses are fully deductible provided that she spent 100 percent of her time on business activities.
- While in Hong Kong, Kelly wanted to visit Disneyland over the weekend. For non-business activities abroad, allocations have to made between deductible business expenses and non-deductible personal ones. The IRS is strictly vigilant of all foreign spend.
- Staying healthy is essential, so she makes it a point to book a gym class at the hotel she’s staying. While her hotel charges are deductible, the additional personal services (movies, games, spa, gym, etc.) are not.
- Entertainment expenses are no longer deductible business expenses, effective with the 2018 tax year.
Fun story: Kelly recently found out that the cost of a cruise may be deductible. All she has to do is ensure it is under the specified limit determined by the IRS (currently $2,000). Also, it must add value to the business, of course!
Limits of tax deductible and the definitions of business travel expenses may be subject to change over time. Regardless, it always helps to keep track of all business and personal expenses.
Keeping a digital record of expenses will help you:
- Avoid confusion and last minute roadblockers
- Eliminates the chances of unnecessary penalties
- Reduces countless back-and-forth, both within your organization and the government.
For an effortless and easily available means, using a mobile app that tracks expenses is highly recommended. Digital records also help in clarifying doubts if you lose the physical records of the expenditure.
Kelly uses Fyle to extract expense details from her receipts automatically. The app even reconciles her credit card expenses and keeps a repository of unlimited expenses. It can even calculate deductible mileage rates based on her travel.
What’s more? Fyle also allows her to file expenses right through her email inbox. Kelly never has to type or collate expense details anymore. This gives her enough extra time to catch up on her reading.