The IRS loves to complicate things, and they've truly outdone themselves when it comes to the business travel deduction rules. You see, business travel and entertainment deductions are particularly sore spots for the IRS, because the agency knows that many people break the rules and falsely claim these deductions.
The agency has reacted by making the standards more and more detailed and specific in an attempt to close down every possible loophole. Of course, that makes life a lot harder for people who actually qualify to claim these deductions.
Business travel defined
The IRS defines business travel expenses as "the ordinary and necessary expenses of traveling away from home for your business, profession, or job." The first complication arises when you try to pin down the concept of "home," which you'd think would be pretty self-explanatory -- but not when the IRS gets involved. The agency has come up with the concept of a "tax home," meaning the city or general area where your primary place of business is located. If you live in New Jersey but work in Manhattan, then Manhattan would be your "tax home" for purposes of deciding what counts as travel.
"Travel" is anything that 1) takes you outside of the city or general area where your tax home is located and 2) takes long enough, or is far away enough, that you would reasonably have to stop somewhere along the way to rest. If you're traveling because you're looking for a new job in the same line of work as your most recent job, you can consider it business travel for tax deduction purposes. If you're traveling to a temporary work assignment location, you can deduct the costs as travel expenses only if your work assignment is expected to last for less than one year. Otherwise, the new work assignment location is considered your tax home for the year.
Common business travel expenses
Types of expenses that you can deduct as travel expenses include:
- Transportation costs, whether by car, bus, plane, taxi, train, or camel-back.
- Shipping fees for baggage or other materials, such as displays for a trade show.
- Hotels and other lodging fees.
- 50% of meal expenses.
- Laundry expenses, including dry cleaning.
- Phone calls, internet charges, and other connection costs -- as long as they're related to your business and are not personal calls.
- Miscellaneous "ordinary and necessary expenses." If you can justify it as a standard part of traveling, you can deduct it.
Traveling to a convention adds a few new wrinkles to claiming the deduction. If the convention is within North America and is directly related to your business, then you can deduct the expenses, as usual, for business travel. However, hang on to every brochure and bit of paper that documents the nature of the convention and of your activities, because this is definitely something that the IRS will ask to see should you be audited.
Conventions outside of North America are scrutinized even more closely. You'd better have an excellent, plausible reason why you needed to travel to a convention overseas for the IRS to grant the deduction. If you attend a foreign convention and also spend part of your trip on personal activities -- for example, if you take a day off to go sightseeing -- you will need to meet one of the following requirements in order to qualify for the full deduction:
- You spent less than one week outside North America
- You spent less than 25% of your time on personal activities
- You can prove that no part of the trip was a vacation
If you don't qualify for any of the above, you'll need to prorate your travel deduction based on how much of the trip you spent on business versus personal activities. For example, if you went on a 10-day business trip to the Riviera and spent four of those days relaxing on the beach, then you could only claim 60% of your expenses for the trip as a deduction.
Bringing the kids along
If you bring friends or family along on a business trip, you won't be able to deduct their expenses, but you can still deduct all of your own expenses. For example, you can deduct your own plane ticket, and you can deduct the usual cost of a single hotel room for the hotel where you stay, even if you take a larger room and all of you share it. If the family members you bring along are employees, then you can deduct their expenses. (But they must actually be employees -- don't try to claim you brought your 11-year-old along to take notes at meetings.)
Employees and the business travel deduction
Employees on business travel are often reimbursed by the company they work for. If your company has an accountable reimbursement plan -- meaning that it requires you to show receipts and it only reimburses you for actual expenses -- then you can't claim a deduction for reimbursed trips. But you also don't need to report the reimbursement as income.
If it's not an accountable plan -- for example, the company reimburses you at a flat rate without reference to your actual expenses -- then you can claim a deduction for your travel expenses, but you also need to report the reimbursement as income (and therefore pay income taxes on it). Obviously, it's simpler when it comes to taxes just to use an accountable reimbursement plan.
How to claim the deduction
Self-employed taxpayers claim their business travel deductions on Schedule C, along with other business expenses. Employees without an accountable reimbursement plan fill out Form 2106 and carry over the expenses to Schedule A as itemized deductions. They must also subtract 2% of their AGI from their travel expenses, and can claim the remainder as a deduction.