Planning Your Travel to Be a Tax Write-off
One of the advantages of owning a business is that you can often intertwine personal and business-related activities and get a full or partial deduction for the costs. It’s not about doing anything illegal or taking unauthorized deductions. Instead, it’s a chance to do things that you probably couldn’t afford otherwise, or you wouldn’t do if they weren’t in conjunction with the operation of your business.
Valid Travel Expenses are Deductible as Business Expenses
The key is that the IRS considers the expense as a valid one for business purposes. One example is the mileage deduction for the valid business use of your personal vehicle. Another is deducting some or all the costs associated with travel for business purposes. In the U.S., generally all the valid travel expenses solely for business are deductible. Travel outside the country carries limitations that require breaking out expenses based on business versus vacation activities.
To help satisfy IRS requirements, you must be able to prove the valid business purpose for all deductible items on your return. Unless you’re in the top 1% and can hire people to read articles like this for you, it’s not worth the potential hassle and penalties to try and fudge on travel expense deductions. Often you can plan your activities during a business trip to better relate them to the business purpose.
One wrinkle that you should consider if you’re about to start a new business or acquire one is that expenses for that travel are not normally deductible as “business expenses.” It’s not your business yet. However, if you do buy or start that business, you can usually then deduct or depreciate/amortize them as startup expenses.
Possible Valid Business Travel Expense Items
Some or all these items can be approved business purpose deductions. The one common requirement is that the item, or percentage of the item’s cost that is deducted, be solely for the purpose of conducting business. Another limitation common to all is that if you have a travel companion, their expenses are only deductible if they are a part of the business and performing business functions. If you bring your spouse, you’ll have to be able to validate that they are an employee or owner of the business and engaged in the business trip activities.
- Hotel expenses – these would include the cost of the room and other fees related and charged by the hotel, even reasonable tips. Room service meals may be deductible at 50% of their cost. Laundry and cleaning fees charged by the hotel are also usually deductible.
- Air, bus, taxi, and train fares – these are easily verified with the ticket stubs and credit card charges. Baggage fees would also be deductible.
- Rented temporary office space or equipment rentals – an example would be renting a projector and hotel meeting room for a business presentation.
- Telephone or other communication related expenses – In today’s world of cell phones, it may be difficult to impossible to carve out the cost of using your personal phone for business on any given trip. However, you may be able to write off a portion of the base fees based on your ability to prove that percentage of ongoing business use. However, any telephone call charges using the hotel phones would be deductible as travel expenses.
- Rental car expenses – suppose you fly to a city for business and rent a car to get around while conducting your business. If all you do is conduct business during your stay, then you can normally deduct the rental car expenses in total. However, if you decide to enjoy a trip to an area tourist spot when you have some free time, the IRS wants you to carve out a portion of your expense deduction for that trip and other expenses at that destination.
- Meals – meals when travelling, as well as meals with clients for business discussions are deductible, but only at 50% of the costs.
That’s a lot of record-keeping, and there are yet more considerations about deductibility of travel expenses.
Travel Expenses Must be Ordinary, Necessary, and Reasonable
- Taking “reasonable” first, the IRS doesn’t like to see what they consider extravagant expense deductions. Unfortunately, they tend to define what “extravagant or lavish” means on a case by case basis. You can still fly first class or eat at fine dining establishments. However, renting the Penthouse Suite for your business trip to discuss your costs for supplies could be an issue.
- As far as “ordinary” goes, the IRS would probably have a problem with your purchase of that new 72-inch TV for your home repair business. That would also fall into the “necessary” classification.
Travel expenses necessary to your business should be deductible, and you’ll rarely have a problem if you stick to the rules. Often, if you’re hesitating to write an expense off, it’s probably going to be an issue. Be conservative and be thorough in keeping records.