The category of travel expenses is one of the most common type of business deduction and also one of the most confusing. Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. You cannot deduct expenses that are lavish or extravagant or that are for personal purposes.
There are generally two reasons an employee/business owner may incur travel expenses. Traveling away from home because your duties require you to be away from your 'tax home' for a period of time longer than an ordinary work day and travel incurred for seminars, conventions or continuing education.
Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals, or lodging in Milwaukee because that is your tax home. Your travel on weekends to your family home in Chicago is not for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.
In determining your main place of business, take into account the length of time you are normally required to spend at each location for business purposes, the degree of business activity in each area, and the relative significance of the financial return from each area. However, the most important consideration is the length of time spent at each location.
Travel expenses paid or incurred in connection with a temporary work assignment away from home are deductible. However, travel expenses paid in connection with an indefinite work assignment are not deductible. Any work assignment in excess of one year is considered indefinite. Also, you may not deduct travel expenses at a work location if it is realistically expected that you will work there for more than one year, whether or not you actually work there that long. If you realistically expect to work at a temporary location for one year or less, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become nondeductible when your expectation changes.
Travel expenses for conventions are deductible if you can show that your attendance benefits your trade or business. Special rules apply to conventions held outside the North American area or on a cruise ship.
Deductible travel expenses while away from home include, but are not limited to, the costs of:
- Travel by airplane, train, bus, or car between your home and your business destination. (If you are provided with a ticket or you are riding 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 of baggage, and sample or display material between your regular and temporary work locations.
What about a business trip that gets extended for personal use or a business trip where you want to include your spouse?
In the case of a business trip that gets extended for personal use, the first test is that the trip must be primarily for business. This is determined by the amount of time spent on activities directly relating to business as opposed to time spent on personal activities. Non-business side trips and non-business personal days spent in hotels are not deductible. Travel expenses of another individual are generally non-deductible, unless the spouse or dependent is an employee of the taxpayer, they have a bona fide business purpose in travelling, and their expenses would otherwise be deductible.
There are substantiation requirements for travel expenses upon audit. Taxpayers are required to maintain an account book, diary, log or trip sheet as well as documentary evidence (receipts, canceled checks, etc.) to substantiate the amount, time, place and purpose of the business expense. For conventions or continuing education, class agendas would be sufficient proof.
Employees may not deduct business expenses that are eligible for reimbursement from the employer.
Reimbursements made to an employee under an accountable plan are not included in the employee's income, and the employee does not deduct the expenses. An accountable plan requires the employee to substantiate all expenses before a reimbursement is given. Reimbursements made to an employee under a nonaccountable plan are treated as taxable wages and reported in box 1 of Form W-2. The employee would then deduct the expenses on Form 2106, subject to the 2% of AGI limitation on Schedule A. The accountable plan is more advantageous from a tax standpoint, but the nonaccountable plan is more advantageous to the company from a records standpoint.