Some costs of business travel can be deducted on federal taxes if they are helpful to the conduct of a taxpayer’s business. The deductibility depends on where your “tax home” is, the distance traveled, the number of days away, whether the destination is abroad or within the United States, and to what extent a trip is related to business. The percentage deductible can depend on the type (meals and entertainment are only 50% deductible) and the proportion of a trip that is related to business.
For each trip, in your records include the business reason for each day of a trip.
If mixing business and non-business matters on a trip, use online travel websites to find out what the cost would have been had you not booked the non-business travel. As you will read in this article, this information can be the basis of the travel deduction.
Become familiar with the rules of deductibility for foreign travel, travel by water, and conventions outside the United States. There are special rules outlined in this article.
Include separate categories in your accounting system for meals and entertainment, taxi fare, mileage, airfare, lodging, and incidentals since these categories can each be subject to different limits of deductibility.
Keep all receipts. Even though there is a threshold under which receipts are not needed to substantiate deductions, the information on the receipts could be critical to securing a deduction (for example, date, location, etc.).
Commuting expenses, that is the cost of commuting from your residence to your main place of work (tax home), are not deductible.
Ordinary expenses are ones that are common and accepted in the trade or business. Necessary expenses are ones that are appropriate and helpful to your trade or business. Regardless of the nature of the expenses, only ones that are ordinary and necessary in the trade or business are deductible (or partly deductible as the case may be).
Which Trips Qualify
Because deductible travel is centered on how far and how long a time a person is away from their tax home, determining a taxpayer’s tax home is crucial. A tax home is the taxpayer’s regular place of business. If a taxpayer splits time among two or more places of business, one location must be chosen based on the one in which the taxpayer:
- spends the most time,
- has the highest level of business, and
- makes the most income.
All these factors must be weighed in a reasonable manner to reach a conclusion. As such, the determination of a tax home is a matter of judgement.
When a taxpayer is away from their tax home doing work that that lasts significantly longer than a day and requires rest to perform the work properly, the travel is deductible to the extent permitted.
Travel within the United States
Mileage, airfare, taxi fare, rental cards, lodging, food, and incidentals are all eligible to be deducted if the costs are related to business. For travel within the united states, a trip must be primarily for business for the travel to be deductible. Non-business costs, such as costs for activities that are not related to business (for example, a taxi from a hotel to a movie not related to business) are not deductible. Meals and entertainment related to business are 50% deductible (please see my blog on meals and entertainment for rules regarding these expenses).
Costs of Getting to and from Destination – Within the United States
Expenses related directly to business on a trip are deductible (meals and entertainment at 50%). However, the deductibility of the costs of getting to and from the destination of the trip within the United States depends on whether the trip was primarily for business. If a trip is primarily for business, the costs to get to and from the destination are deductible, provided that are ordinary, necessary, and not lavish. Generally, a trip is primarily for business if it is not a vacation and is made to achieve some business objective.
Costs of Getting to and from Destination – Outside the United States
The costs of getting to and from the destination on a trip outside the United States are deductible (sometimes in part only) if:
- The entire trip is spent on business matters, or
- The taxpayer has no substantial control of taking the trip because they are a non-managing-executive employee, or
- The trip lasts for 7 days or less (not counting the day of departure, but including the return date), or
- Less than 25% of the time was spent on personal activities, or
- Vacation is not a major consideration
If one of the above conditions is true, then all the costs of getting to and from the business destination are deductible, but based on what it would have cost had non-business activities not occurred. So the actual amount deductible may be different from what was paid. For example, if your airfare was booked including a non-business destination, the amount deductible is based on what it would have cost if that non-deductible business destination were not included in the price.
Of the conditions above were not met, then transportation costs for trips outside the United States must be allocated between business (deductible) and non-business days (non-deductible) by dividing the days spent on business by total days away. Days spent traveling, days where presence of the taxpayer is required (regardless of the level of business activity on that day), holidays and weekends between business days are all considered business days.
If a trip outside the Unites States includes non-business travel before reaching a business-related foreign destination, and/or non-business destinations other than a taxpayer’s tax home after returning from a foreign destination, the cost of traveling to and from the destination must be allocated among business and non-business based on the number of days of each and what costs would have been had travel been directly to the foreign business destination.
For example, if a taxpayer whose tax home is in Chicago stops over in Dublin for a vacation or to visit friends after a business trip to Paris, the costs of getting to and from the business destination must be allocated to business and non-business amounts. The fraction is the business-related days spent outside the United States divided by total days outside the United States. In the above example, if a plane ticket from Chicago to Paris to Chicago would have cost $1,000, and the fraction is 4/5, only $800 of the travel costs are deductible, as would be the taxi fare to and from the airport. It does not matter what the actual cost of the transportation was, only what it would have cost.
Luxury Water Travel
The deductible portion of business-related costs while on an ocean liner, cruise ships, and other luxury water transportation is capped per day per IRS publications and changes annually. Additionally, while on luxury water travel trips, the cost of meals, entertainment, and incidentals are also capped. Please see IRS publication 463.
Costs of attending conventions are deductible if they benefit the taxpayer’s trade or business in relation to the attendee’s official duties and responsibilities. However, trips for investment, political, social, or other non-business reasons are not deductible.
The cost of conventions held outside of the North American Area (please see IRS publication 463) are only deductible if it is reasonable to hold the meeting in such area. The factors to determine reasonableness of the location include the purpose and activities of the of the meeting, the sponsoring groups, the homes of the members of these groups, and whether similar conventions were held in similar locations.
Convention costs deductible while on a cruise ship are capped at $2,000 per year. Additionally, the content of the convention must be directly related to the taxpayer’s trade or business, the ship must be registered in the United States, and the ports of call must all be in the United States or its possessions. A statement must accompany the taxpayer’s return detailing the total days of the trip, the of hours each day spent on business activities, and a program of events. The statement must be signed by an officer of the sponsoring organization verifying the information.
A taxpayer is considered on temporary assignment when returning to their tax home regularly would be impractical. Costs of travel, lodging, and meals are deductible travel expenses in these cases. Temporary assignments must be expected to and actually last for less than one year in length to qualify. If an assignment is indefinite or becomes the taxpayer’s new tax home, no costs are deductible. In fact, reimbursement from a taxpayer’s employer in this circumstances must be counted as income are taxable to the taxpayer. Costs that a taxpayer incurs while visiting their tax home are not deductible.
Disclaimer: The information in this document is not tax advice and should not be relied upon to take a position on a tax return or for tax planning.