Welcome to inDinero’s Pot of Gold. In this series, you’ll learn quick, actionable tips to protect and build your company’s capital and personal finances. Whether your “pot of gold” is figurative or literal, these tactics will better enable you to maximize your wealth.
Today we’re exploring a popular but often-misunderstood tax-saving strategy: travel expense deductions.
Can (and Should) You Deduct Travel Expenses?
You just came back from a two-week-long trip to Germany. You’re a self-employed sole proprietor. As with so many trips you take, this one combined elements of business and pleasure. Between meeting with clients, you toured the cities and countryside, visited a few castles, and tried some local cuisine—plus “a few” beers.
But enough reminiscing. Let’s get to why you’re here. You want to know if you can deduct the trip during tax time—and, assuming you can, whether you’d save any money doing so versus taking the standard deduction.
So, can you? Yes, you can probably deduct a few things. Should you? That one’s a little harder to answer.
First Things First: Determine Your Tax Home
Your “tax home” is your business’s main geographic location—not your home, i.e. where you and your family live. It’s your headquarters—the place with the greatest financial importance to your company.
If you live in northern New Jersey but commute to New York City for work every day, NYC 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.” However, 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’s far enough away from your tax home to be considered travel.
Generally, a tax home is limited to the city in which it’s located. (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.)
Next, Think About the Length and Purpose of the “Business Trip”
Once you’ve figured out your tax home, the next step in determining if travel deductions are possible (and worthwhile) involves looking at the purpose of the trip in question. If you’re like most business owners, your trips tend to mix business with non-business. The Internal Revenue Service doesn’t have a problem with that. What they want to know is the ratio of business to pleasure.
The more “business” you can prove, the better shape you’re in for deducting the associated travel expenses from your taxes. According to the IRS (emphasis added): “Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.” In other words, the key is demonstrating that you needed to take the trip and pay for the “business”-related costs you incurred along the way.
Before we move on to which expenses you can and can’t deduct, there are a few caveats to note:
Day trips aren’t deductible. You need to be away from your tax home for a period “substantially longer” than a day’s work.
You may be able to deduct certain parts (but not all) of a personal trip. 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. Tempting as it is, you shouldn’t try to get away with deducting the whole trip. You can, however, deduct the cost of lunch as that is clearly a business expense.
Certain rules apply to international travel. If you spend the entire duration of your trip abroad conducting business, you can deduct it. But it doesn’t need to be 100% business to be a “business trip” as far as the IRS is concerned. The IRS may consider your trip “entirely for business” if you can meet one or more of the following criteria:
- You spent more than 75% of trip conducting business.
- You were outside of the U.S. for a week or less (counting the day you returned, but not the day you left).
- You didn’t have substantial control in planning the trip (note that this exception almost always applies to employees, not business owners).
- A vacation wasn’t a “major consideration” when planning the trip.
Going back to the example we started with, let’s say you spent three days of those two weeks in Germany not doing anything business-related. In that case, you can classify the whole thing as a business trip. If the trip lasted less than a week and you spent less than half that time on business, it may have still counted as a business trip. Even if you only needed to be there for one day, the trip may be considered entirely for business if you can demonstrate your outings weren’t the main point you decided to travel abroad.
Finally, Consider Deducting Travel Expenses
You can’t deduct everything related to business travel. Here are a few examples of what you can deduct, according to the IRS:
- travel by plane, train, bus, or car between your home and your business destination
- 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
- costs of shipping baggage and/or sample or display materials between your regular and temporary work locations
- use of your car while at your business destination (certain restrictions apply, particularly with rental vehicles)
- meals and lodging (as long as they’re not for entertainment purposes)
- dry cleaning and laundry costs
- business calls
- other “similar ordinary and necessary” expenses related to your business travel (e.g. transportation to and from a business meal, public stenographer's fees, computer rental fees, operation and maintenance of a house trailer)
- tips you pay for any of the services above
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.
With all the above in mind, you may be surprised to learn that deducting travel expenses is rarely a good idea. It’s highly unlikely you’ll save more than you would by claiming the standard deduction. Factor in the cost and effort of itemizing everything—along with the higher risk of getting audited—and this deduction is almost never worth it.
That said, your situation may be different. Don’t write off that trip to Germany just yet, so to speak, without first talking to your tax and accounting partner. Ask us about deducting travel expenses.