Written by: Karen Reed, EA
As a Business Traveler, What Can You Deduct?
If you are a business traveler – either as an employee or a self-employed business owner – you are allowed to deduct the costs of your meals, lodging and transportation costs, as well as incidentals, such as tips and laundry, for your trips away from home that require an overnight stay.
Your deduction for meals is limited to fifty percent of your actual costs, unless you work in the transportation field – for example, as a truck driver, bus driver or airplane pilot – and are subject to Department of Transportation (DOT) regulations. If you do fall under DOT rules, you are allowed to deduct eighty percent of your meal expenses.
Entertainment expenses are also limited to fifty percent, and there must be a business purpose. The entertainment event should occur directly before or after a business meeting or in a setting conducive to a business discussion. A contemporaneous listing of your entertainment expenses is the best way to provide the required substantiation, along with the related receipts and proof of payment.
What Expenses Are Not Deductible?
Travel expenses related to a work assignment that is indefinite or expected to go on for more than a year are considered personal, nondeductible expenses. The IRS does not allow deductions for lavish and extravagant travel expenses, the costs of personal side trips and personal activities, the extra expenses involved in extending a stay for personal reasons, or travel costs for a spouse or other travelling companion, unless the companion is an employee or has a business purpose for going on the trip.
Specific requirements need to be met in order to deduct expenses for attending seminars and conventions outside of North America or on cruise ships. In addition, if you extend a stay for personal purposes when travelling outside the U.S. on business for more than one week, you should make sure that you do not spend 25% or more of your time on the trip on nonbusiness related activities, otherwise your allowable deductions could be limited if certain requirements are not met.
Are There Any Tricks?
Whether or not you should report your travel expenses on your tax return depends on the type of reimbursement plan you have at work. Accountable reimbursement plans require employees to account for business expenses and return excess reimbursements, and usually no tax reporting is needed. Nonaccountable plans provide additional compensation to employees for travel expenses without requiring them to provide receipts for their expenses. An accountable plan is generally more advantageous for the employee, as a dollar for dollar reimbursement is better than the partial benefit one receives from claiming a tax deduction.
Moreover, employees who do not itemize deductions or who are are subject to the Alternative Minimum Tax receive no tax benefit at all from claiming unreimbursed job-related expenses. And those who are able to claim a deduction will have it limited by the two percent of the Adjusted Gross Income (AGI) threshold for employee expenses.
What Are Some Tips for Business Travelers?
If you are an employee who is responsible for paying for your own travel expenses and you do not have an accountable plan at work, consider requesting that your employer include an accountable plan in your compensation package. If you do have accountable plan at work, be sure to submit your receipts for reimbursement. If you are entitled to be reimbursed for your expenses but fail to seek reimbursement, you are not allowed to claim a deduction according to IRS rules.
How Long Should Business Travelers Keep Records?
For most taxpayers, the minimum length of time to keep records for the federal return is three years after the tax return is filed, and possibly longer for a state return. There are a number of situations in which you might need the records longer. For example, if business property, such as a vehicle, is involved, the records should be kept for at least three years after the vehicle is sold.
If there is a net operating loss with a carryforward, the records should be kept three years after the last tax return reporting the carryforward of the NOL, which could be over 20 years in some cases.
Other records that will be needed to substantiate business trips in an audit include the time and place of the travel or entertainment event, information about the people involved in the meetings, and the business purpose. You should also keep descriptions of the expected benefit of the meetings and the business discussions with your records.
If you are an employee and you are audited for your job-related expense deductions, you will also need to supply the IRS with a letter from your employer.
If you have questions about how to report your business travel expenses, consider becoming a TaxAudit.com Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions in a prompt, accurate, and confidential manner.
This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2),(8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.