Tax-Deductible Business Trips
By Scott C Turner, CPA
Whenever and wherever you travel you could be traveling on business, and reasonable business-travel expenses are tax-deductible, even if tied into personal travel or family vacations!
Pay close attention, because the IRS rules about tax-deductibility of business travel are very specific. But they are also very clear, so you should have no problem making sure you are staying within the legal parameters, or determining if some of the expenses for a particular trip are deductible as business expenses, whether an incorporated business, or a smaller home-based business.
The tax law says that anytime your work “requires you to sleep or rest away from your principle place of business” (that’s your home office), you may deduct reasonable travel and related expenses (such as meals, hotel, rental car, tips, etc.)
[ IRC Section § 162(a)(2) and Revenue Rulings 54-497, 75-432, 63-145, 75-169, 76-453 ]
The IRS’s 3-Part Test
The first step in audit-proofing your business travel deductions is to meet the IRS’s “3-Part Test”:
The travel must be usual and customary within your type of Business.
The travel must be conducted with the intent to obtain a direct business benefit.
The travel must be appropriate and helpful to developing and maintaining your business.
In addition, the days spent for business must exceed the days spent for personal to deduct certain expenses.
What is the “51/49% Transportation Rule?”
For travel within the U.S., when you combine business travel with personal or vacation travel, the tax law allows you to deduct 100% of your transportation costs, in addition to lodging and meals for your business days…
IF you spend more than ½ of your days on business, and less than ½ of your days on non-business purposes,
And IF the primary purpose of your trip was business.
[ IRC Section § 1.162-2(b)(2)]
What is Considered a “Business Day?”
Depending upon the method of travel and the length of the trip, getting to and from your destination can take up the majority of a day (or more) each way. Therefore, it is important to know how the IRS defines “business day” which we will cover shortly.
If the primary purpose of your travel is business, the cost of transporting yourself to your “business destination” is tax deductible, whether you travel First Class air, Coach Class air, train, car, boat or even chartered plane (as long as the method meets the ‘usual and customary’ test mentioned above).
Once you arrive at your destination, you will incur certain other expenses, such as taxi fare, car rental, hotel, meals, tips, etc.
You may deduct food and lodging expenses for “business days” even if your trip does not include enough business days for it to qualify as a “business trip.” For example, if you make a 5 day trip, but only 2 days are spent on business, you may deduct your meals and hotel for those two days only, but you may not claim any of the transportation costs, because the trip will not have met the 51/49% Transportation Rule discussed earlier.
What About Weekends and Holidays?
If weekend days and/or holidays fall between business days, they are considered by the IRS to be business days. For example, you travel to a destination on Wednesday, do business on Thursday and Friday, and do business again on Tuesday. Saturday and Sunday will be considered to be business days and Monday considered a personal day.
The test is this: Would it be practical to return home for the weekend or holiday days? If so, they are not deductible. But if it would not be practical to return home (due to the expense or the time required), they are considered to be business days, regardless of what you actually do on those days. [ Reg Sec § 1.274-4(d)(2)(v) ]
What About Saturday Night Stay-Overs?
Oftentimes, airlines offer substantial fare discounts if a Saturday night stay is included.
Good news for you!
“If a substantial discount is available by including a Saturday night stay, Saturday may be considered a (tax-deductible) business travel day and Sunday is considered a (tax-deductible) business stay-over day” even if you return home on Monday.
[PLR 9237014 ]
When is a Travel Day Also a Business Day?
Even if you conduct no business on the day you travel, it is still a tax-deductible business day IF you spend at least four hours in travel. That four hours includes the time it takes you to get to the airport, park, check-in, wait for the plane, fly, disembark, wait for your luggage, get a taxi or rental car and get to your hotel.
As inefficient as airline transportation can be these days, just about any trip you take could qualify under these criteria.
So, if getting to and from your destination takes four hours or more, the entire day qualifies as a “business day.”
Does It Make Any Difference What Method of Transportation I Use?
Simple answer: No. If you travel by auto, airplane, train, boat or motorcycle, your actual travel expenses are 100% fully deductible if the trip qualifies as “business travel.” [IRS Publication 463 ]
Can I Claim My Spouse’s Expenses if He/She Accompanies Me to a Business Meeting or Convention?
Expenses of an accompanying spouse are deductible only if:
His/her travel is for a bona fide business purpose (i.e., not just accompanying you),
He or she is an employee or owner of the business (see Chapter VI), and
The travel and related expenses would be deductible for him/her even if he/she were making the trip alone.
[ IRC Section § 274(m)(3) ]
Can I Deduct Laundry and Dry Cleaning?
Yes, if you are required to remain out-of-town for one or more nights, you can deduct the cost of laundering or dry cleaning any clothing required for that trip, even if you wait and have the cleaning done after you return home.
[ Internal Revenue Ruling 63-145 and 1963-2 C.B. 86 ]
Let’s Summarize the Deductions for Traveling on Business “Ordinary and Necessary” business expenses include:
50% of the cost of all meals
[Reg Sec § 1.162-2(a) ]
100% of transportation and lodging
[IRS Publication 463 ]
100% of laundry and dry cleaning of clothing used during business portion of trip
[Internal Revenue Ruling 63-145 and 1963-2 C.B. 86 ]
Telephone calls, both local and long distance
[Reg Sec § 1.162-2(a) ]
Local transportation from airport to hotel, to customer visits, and back to airport (including taxis, limos, trains, buses, rental cars, etc.)
[IRS Publication 463 ]
All appropriate tips associated with otherwise-deductible expenses
[ IRS Publication 463 ]
Keeping Audit-Proof Business-Trip Records is Easy
This is not difficult unless you procrastinate and do it later. All the IRS requires is the answers to 5 questions:
1. Where Did The Money Go?
List each individual expenditure, such as plane tickets, taxi fares, meals (listed separately), tips, registration fees, etc.
2. When Did You Spend It?
Dates and times of departure and return, as well as date of each expenditure.
3. Where Did You Spend It?
City you flew to, restaurant you ate in, from-and-to of each taxi fare, name of hotel you stayed in, who you gave tips to, etc.
4. Why Did You Spend It?
Justify the business purpose of the trip itself, and the business reason for each expenditure. Not everything is automatically deductible. For example, in-room hotel movie rentals and purchases from a hotel room mini-bar are normally not deductible.
5. Can You Prove You Paid Your Bills?
You’ll need copies of paid receipts for hotel stays, transportation expenses, conference fees, cash tips or taxi rides, and any individual expenditure of $75 or more.
Personally, I even get a receipt for buying the morning paper, because I’ve developed a habit of getting a receipt every time I buy anything. It’s a lot easier to throw away, or file, a receipt than to try to justify an expense without one. And I just toss them all in one large envelope and label it.