Figuring out business travel expenses can be confusing. The IRS has many rules outlining deductibility, and without a well-thought-out system for tracking business expenses, maximizing deductions while remaining protected from an audit can be a challenge.
This article is a part of our ultimate guide on business expenses and tax deductions. We’ll cover everything from the general rules and efficient record-keeping to incorporating tax-deductible personal days into your trip. Let’s dive in.
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Understanding Business Travel Expenses
When deducting travel expenses, there are two essential factors to remember:
- The clear distinction between business and personal spending
- The thorough documentation of all expenses you intend to deduct.
No deductions are allowed for either personal or non-documented expenses.
But even with these distinctions, it’s still hard to know what exactly counts as a business expense, especially if you mix business and personal travel. So, let’s establish what the IRS considers valid travel and business expenses.
From here, we need to answer two questions: What does the IRS consider “travel,” and what is a valid business expense?
What Counts as a Business Expense?
The IRS language on this topic is broad. As long as the expense is considered “ordinary and necessary” and is backed up by documentation, it’s an allowable expense.
In specific terms, an ordinary cost refers to an expense that is commonly practiced and accepted in your line of work. In contrast, a necessary cost pertains to something helpful and appropriate, but not critical, for the functioning of your business.
Because of the broad applicability of “ordinary and necessary,” sometimes it’s easier to know what counts by knowing what doesn’t. In short, you can’t deduct for clothing, club membership dues (even if used for business purposes), or anything strictly for personal use. For more information, see our article on nondeductible business expenses.
What Counts as Travel?
According to IRS guidelines, business travel involves trips taken primarily for business purposes that require you to stay away from your “tax home” for more than a regular workday. Simply put, this means sleeping overnight somewhere other than your home.
You might think that your “tax home” is simply the city where you live. Usually, that’s correct. However, if your work and home are substantially different places, your “tax home” is where the business is located. In other words, living in one city and working in another is considered commuting rather than a deductible travel expense.
Since this deduction is intended for temporary work assignments, it’s not considered a business travel expense if the trip lasts longer than a year. In the eyes of the IRS, if you’ve been away from your tax home for that long, you have likely moved to a new location altogether (and should, therefore, change your tax home).
What About Mixing Personal and Business Travel?
As long as the trip is for “primarily business,” meaning more than half of the days away are spent conducting business rather than personal matters, the entire trip is acceptable for business for tax purposes.
For instance, if you spend seven days away from your tax home, four on business, and three visiting family, this trip is considered business travel. However, this trip would no longer count if you were to visit family for four days and work only for three.
Notably, a day in transit (such as taking a flight or driving to your destination) still counts as a work day, even if some of your time traveling could be considered personal.
However, suppose you’re a solopreneur and decide to bring a guest on the trip who splits the cost of accommodations and travel with you. In that case, only the portion you were responsible for is deductible.
International vs. Domestic Travel
For international trips, one must only spend over 25% of their time abroad working for it to be considered a business trip. This contrasts domestic trips, where one must dedicate more than 50% of their days to business purposes.
Business Travel vs. Commuting
It is essential to distinguish between business travel and commuting, as commuting expenses are not deductible. Business travel refers to overnight trips taken away from your regular place of work. On the other hand, commuting pertains to the daily travel between your home and your regular place of work.
Valid Business Travel Expenses
Given the broad “ordinary and necessary” definition the IRS provides, sometimes having a list of allowable business travel deductions is helpful.
Except for meals, which are 50% deductible, all of the following are 100% deductible travel expenses:
What Transportation Costs Are Deductible?
Transportation expenses are a fundamental part of any business trip. Deductible transportation costs include airfare, train tickets, car rentals, and local transportation (such as taxis or rideshares) to travel between your accommodations and business destinations.
Is Gas Tax Deductible?
In a word, yes. This is slightly different than the travel expense deduction, but there’s quite a bit of overlap.
If you pay for gas on a rental vehicle, it’s fully deductible. Should you pay for gas with your vehicle, then the deduction depends on whether you use the standard mileage or the real expense deduction method.
For more information, see our article on mileage reimbursement.
Is Luggage a Business Expense?
Yes, luggage is one of the many business expenses you’ll have during a business trip. This includes purchasing new luggage for business trips and any fees you pay to check luggage.
What Accommodation Expenses Are Deductible?
Business travelers can also deduct lodging expenses while away from their tax home. The expenses incurred can be deducted if you stay at a hotel, motel, Airbnb, or other lodging facility.
Are Miscellaneous Supplies and Materials Deductible?
These expenses are generally deductible if you purchase supplies or materials necessary for business activities during your trip, such as presentation materials or office supplies.
Meals While Traveling
The IRS is quite generous with meal deductions while you’re traveling. During a business trip, 50% of the cost of meals is deductible. This includes a quick bite at the airport, ordering takeout, and even a trip to the grocery store.
Recording Business Travel Expenses
Like any business expense, you should only deduct travel expenses that you can back up should the IRS have questions when you file.
We recommend entrepreneurs maintain separate business and personal banking to avoid commingling funds Next, we encourage our clients to use a modern tax software solution that integrates with their bank accounts. That way, the software automatically logs every expense on a business card.
Lastly, keep copies of receipts for your business travel expenses. Most software solutions have apps that allow you to take photos with your phone, making record-keeping a breeze.
For a deeper dive, see our article on how to keep track of business expenses.
Conclusion
By maintaining proper documentation and following IRS guidelines for business travel expenses, entrepreneurs who spend a lot of time on the road can maximize their tax savings.
If you spend a lot of time on the road, keeping track of all your business expenses can be complex. Whether you use a simple spreadsheet or software solution, there are already so many demands on your time that self-managing your bookkeeping may not be worth the cost savings. Consider indinero’s outsourced accounting services for your business needs if this sounds like you.
