Business Travel Tax Deduction: All You Need to Know
Traveling a few times a year (or even weekly) is a need for many small business entrepreneurs. The good news is that most business travel expenses are tax-deductible. Not only that, as long as the trip is mainly for business purposes, you can add a few days of vacation and still claim the trip as a business travel tax deduction (in good conscience). Even though we don't recommend taking advantage of this work trip tax deduction, we want you to know how to use it to save money on your taxes while also getting some rest and relaxation.
Moreover, you do not have to fly first class or stay in a five-star hotel to deduct travel expenses from your taxes. Conferencing, meetings, and site visits can all be considered business travel, but you need to understand the IRS's ground rules before you claim any business travel tax deductions.
What Counts as Business Travel?
Is business travel tax deductible? That depends on whether your trip counts as business travel for the IRS. You can't just hop on the next flight to the Maldives and claim the entire trip as a business expense. The IRS requires that the principal objective of the trip be for business purposes to deduct travel expenses.
Here's how to know whether business trip deductions apply to your trip or not.
Only If You Are Leaving Your Tax Home
As defined by IRS, regardless of where you retain your family home, your tax home is the entire city or general area in which your primary place of business or employment is located. For instance, suppose you live in Chicago with your family but work in Milwaukee, where you stay in a hotel and dine at restaurants. Every weekend, you return to Chicago. You cannot deduct any travel, dining, or accommodation expenses in Milwaukee because it is your tax home. Because your weekend travel to your family home in Chicago is unrelated to your job, these expenses are likewise not deductible.
For your trip to qualify for business travel tax deduction, you will need to travel from Milwaukee to somewhere else for work purposes because Milwaukee is your tax home, and you're not traveling to Chicago for business purposes. You are traveling there only to see your family.
Most Time Should Be Spent on Business Related Activities
Your time away from work is measured in days by the IRS. You must spend most of your vacation on business to qualify as a business trip. For instance, suppose you're going away for a week. You spend five days with clients and two days relaxing on the beach. That is considered a business trip. But what if you spend three days in meetings and four days on the beach? That's called a vacation. Fortunately, travel days to and from your location are considered workdays.
The Trip Must Be an "Ordinary and Needed" Expense
If two nearly identical conferences are being held—one in Honolulu and another in your hometown—you cannot claim a deduction of all-expenses-paid travel to Hawaii. At times, what constitutes "ordinary and necessary" can appear to be a grey area, and you may be inclined to fudge it. You should exercise caution. If the IRS decides to investigate and determines that you claimed an expense not essential for conducting business, you may face severe penalties.
Traveling Outside the US Has Different Rules
If you go outside the United States but spend less than 25% of your time working, you could still deduct travel expenses proportionate to the time spent working during the trip. Think about taking a five-day overseas vacation. Two days of work travel equals 40% of your total time away. Therefore, you can deduct the entire cost of your airfare as a business expense.
The Travel Expenses You Can Write Off
So, are travel costs tax-deductible? The following are some examples of business travel expenses that you can claim.
- Tickets for flights, trains, and buses between your house and your business destination
- Baggage expenses
- Dry cleaning and laundry during your trip
- Costs of car rental
- Hotels and Airbnb expenses
- 50% off eligible business meals
- 50% of meals consumed while traveling to and from your destination
Whether you fly, train, bus, or rent a car, you can deduct the cost of traveling to conferences and business meetings. Toll and parking fees are also included. A regular mileage rate deduction should also be taken into consideration. You can deduct 58.5 cents (the standard mileage rate for business travel 62.5 cents per mile is the standard mileage rate for business travel for the final 6 months of 2022) for each mile of business driving. This reduces the amount of money you have to spend on gas and automobile maintenance (whether your vehicle or a rental). Taxi rides are also included, so be sure to obtain a receipt.
The IRS will allow you to deduct dining expenses. The IRS typically limits the deduction for business lunches to 50% of the cost. Therefore, before you indulge in that $100 feast, keep in mind that only half of it is tax-deductible.
Your hotel expenses are tax-deductible. You can also deduct your accommodation expenses. When you check out, make sure to request an itemized bill because some hotel charges, such as trips to the minibar or movie rentals, may be ineligible.
Equipment Rental, Conference Fees, and Miscellany
Any expenses you incur for your business travel that are necessary, such as event registration, rental presentation equipment, or dry cleaning and laundry for your professional attire, are all tax-deductible.
There is no way to fool the IRS. It has witnessed individuals attempt to claim a variety of bizarre things as business costs. Avoid the hassle, as it will simply increase your chances of being audited. Here are the expenses that are non-deductible.
Costs of Family Travel
While bringing your family along on a work trip can be enjoyable, their expenses do not qualify for a work trip tax deduction. Your hotel costs are deductible as a business expense regardless of whether they are there; their flight tickets and meals are not.
Expenses in Your Tax Home
When you conduct business in your hometown, only your usual mileage rate and meals are deductible, presuming you dine with business contacts. However, you cannot rent a hotel room within a commutable distance of your house (even if you spend the day at a nearby hotel for a conference) and expect to deduct the cost.
True, this category is somewhat ambiguous, but you never know what the IRS will flag. The general guideline is that if you believe an expense is unnecessary to do business, you should not claim it. Being audited is unpleasant, and it is not worth the risk of being found attempting to lower your taxable income through dubious expenses.
Most of your business travel expenses are deductible. However, you should be well versed with IRS rules before writing off any expenses and claiming business trip deductions. It is recommended to keep all of your receipts together while you're on the trip so that you can easily file them when the time comes because the inability to provide evidence can result in a severe penalty.