If you're a business owner who is confused about travel expenses and deductions, you're not alone. Maybe these questions sound familiar:
- “What can I categorize as a business expense?”
- “How much should I give my employees for per diem travel allowances?”
- “Can I deduct this tiki torch as a travel expense?”
We’re here to help you answer all these questions and then some. But before we dig in, you’ll need to know what exactly constitutes a business trip. And to do this, you’ll need to determine your tax home.
Where's your tax home?
Your “tax home” is your business’ main geographic location (not where you and your family live). This means that if you live in northern New Jersey but commute into New York City for work everyday, New York City is your tax home. This means that if you eat in a New York City restaurant or stay overnight at a New York City hotel, the IRS won’t let you categorize these as “travel expenses". But if you drive up to a more exotic destination like Albany for business, you can deduct the expenses of your hotel there. Even though Albany is in the same state as New York City, it is still not your tax home. If you have multiple places of business, your tax home is the one where you spend the most time at over the course of a typical year. Basically, it’s the location that is the most financially important to your business.
Is it a business trip?
As a business owner, you know that business and pleasure frequently mix, especially when you’re traveling. Although it is entirely possible to do business-related work on a personal trip, the IRS says that:
“Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.”
The IRS wants you to be reasonable about business expenses. In this case, “traveling away from home” refers to a trip that requires you be away from your tax home for a period “substantially longer” than a day’s work. An overnight stay typically means that an employee qualifies for a per diem.
Although you can’t deduct a personal trip as a business expense, there are some loopholes. Let’s say you travel to Las Vegas for a personal trip, but while there you take a client out to lunch to talk business. It may be tempting, but we don’t recommend trying to get away with deducting the whole trip. You can, however, deduct the cost of lunch since it is clearly a business expense.
Deducting Travel Expenses
According to the IRS, you can deduct the following travel expenses:
- Travel by plane, train, bus, or car between your home and your business destination (If you are provided with a ticket or you are riding for free as a result of a frequent traveler or similar program, your cost is zero.)
- Using your car while at your business destination. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking fees–If you rent a car, you can deduct only the business-use portion for the expenses.
- Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another
- Meals and lodging
- Tips you pay for services related to any of these expenses
- Dry cleaning and laundry
- Business calls while on your business trip (this includes business communications by fax machine or other communication devices)
- Other similar ordinary and necessary expenses related to your business travel (these expenses might include transportation to and from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer)
- Shipping baggage, and sample or display materials between your regular and temporary work locations
Before your file these deductions be sure you’ve kept detailed records and receipts of every expense you incur during your business-related travel––the IRS closely scrutinizes these types of deductions. The IRS isn’t dumb: they understand that most of us would love to deduct the cost of a “business trip” to the Bahamas.
About Per Diem Expenses
We recommend you give employees a per diem allowance for their travel expenses when they go on business trips. The amount you should give your employee varies according to their destination, because cost of living varies from place to place.
You can look up the suggested per diem rates set by the U.S. General Services Administration and are updated every year on October 1. These are broken up into two types: rates for lodging and rates for meals & incidental expenses (M&IE). Consult this site for the rates for any area in the continental U.S.
For example, a hotel in Chicago will have a higher per diem rate than one in El Paso, because Chicago has a higher cost of living. The differences in per diem rates account for the differences in average price between hotels and restaurants in the two areas.
We have a lot of experience clearing up confusion on travel expenses. If you have questions, drop us a line at (yourcompanyname)@indinero.com and your account team will help you make sense of things.