Many great business owners are always on the lookout for new business tax write-offs. There are many tax deductible expenses that are straightforward. Items such as depreciation, interest, and cost of goods sold. These expenses happen in the normal course of business and show up on your business tax return on the income statement.
Some expenses are less straightforward and take a little time to figure out. Travel expenses can generally be written off, but you may need to jump through a few hoops. Let’s go over how to do it.
Overview: What classifies as a business travel expense?
You can generally deduct at least a portion of all expenses incurred during a true business trip. According to the IRS, a business trip is one that is done for business purposes and is, “ordinary and necessary.” What the IRS determines is ordinary and necessary may be akin to what Zondargs from the planet X-387 believe are ordinary and necessary, so just use your best judgment.
If you fly to North Carolina to go to a NASCAR race with your cousins and send a few work emails while you’re in the seats, it probably shouldn’t be a work trip.
If you fly to Wisconsin to meet with a potential client and close the deal while you’re there, it is a work trip.
Here are the main travel related expenses that you should track:
- Transportation: This includes airfare, bus fare, train fare, and SpaceX fare. You should also record miles if you are driving your personal car.
- Meals and Entertainment: 50% of the costs of these can be written off, if it is for business purposes.
- Lodging: The portion of hotel costs that is used for your or employees can be written off. If you get two rooms so your kids can come, you can’t expense their room.
- Everything else: There could be other expenses incurred on the trip, such as dry cleaning, equipment rental, or toll fees. As long as these expenses are ordinary and necessary, record them and write them off.
One more thing to note: The IRS treats international expenses a little differently. Make sure you are spending at least 25% of your time on business on all international trips for which you want to write off expenses.
How to deduct business-related travel expenses on your taxes
Here’s a good policy for deducting travel expenses.
1. Determine how travel will be paid for
There are a few common ways to pay for travel expenses:
- Prepay: Pay for the hotel room (and maybe room service or restaurant fees) and airfare for your employees ahead of time and leave them responsible for everything else.
- Employee credit cards: Issue credit cards to trustworthy employees so they can pay for anything that comes up. Make sure to require receipts and explanations so you can correctly categorize expenses.
- Per Diem: Per diem is a tax-free payment made to employees that can be used for lodging or meals. Click on the link above to learn the IRS travel rates and how to issue per diem.
- Reimbursement: Have your employees pay for everything themselves, and then pay them back for reimbursable expenses. Reimbursement is generally the most stressful method for employees. My wife’s work does this and we had trouble getting a mortgage because she was carrying four figures of travel expenses on her credit card waiting to get reimbursed.
My company has done all four of these methods within the last month. We prepaid for the hotel rooms for two employees who worked on a job in Wyoming for a week. A VP traveled to Wisconsin for two days and used his work credit card to pay for everything. Three employees worked on a job in Missouri for three days and we gave them per diem for meals.
We were in a pinch with an employee needing to drive to Montana for a job with no company trucks available, so he used his own car and we reimbursed him for the miles.
There is no need to write in stone that you will only use one method. Be flexible and do what works for each situation. Just make sure you keep receipts and you keep it ordinary and reasonable.
2. Eliminate unreasonable expenses
Say it with me again, “Ordinary and necessary.” It’s fine if the business pays for unnecessary things. If your employees are working hard and you want to send them on a cruise, go for it. If you want to bring your family with you on a big trip to New York so that they can talk about how they almost saw Hamilton, it’s a free country.
You just can’t deduct those expenses from your taxes. It also isn’t worth being squirrely about it. The tax write-off amount is almost certainly not enough to risk the reputation of your business. Remember, you are truly only saving whatever your tax rate is on the expense.
If your tax rate is 35% and you write-off an unreasonable and unordinary $1,000 plane ticket, you’re putting yourself and your business at risk to save $350. You can save that much by filling up the employee vending machine with stuff from Costco instead of the grocery store.
3. Plan ahead
One of the best ways to prove that something is ordinary and reasonable is to schedule it well ahead of time. If you want to go to a conference, buy the tickets, reserve your airplane seats, and pay for the hotel rooms when you find out about it.
Some people even recommend creating a day-by-day itinerary ahead of time to prove intent, and saving it should questions arise later. Any evidence you have when an audit comes can be helpful. Keep every receipt too.
4. Calculate Mileage
The IRS has two methods for mileage costs:
- Expense everything individually. That means you expense the gas purchases, oil changes, and repairs as they happen.
- Expense a flat fee per mile. The current is 57.5 cents per mile.
Most businesses will expense everything individually for company-owned vehicles because it is easier to do than to pay for all vehicle-related expenses and then use a different amount as the expense on the tax return.
On the other hand, it is far easier to simply reimburse employees for their mileage than to try to figure out what percent of their most recent oil change should be reimbursed.
5. Record expenses and file taxes
The last step is to record the expenses as you would any other expense and import that information into your tax software along with the rest of the income statement.
Where we’re going, they don’t need tax write-offs
One of my favorite movie scenes is this exchange from X-Men:
Storm: Do you know what happens to a toad when it’s struck by lightning? The same thing that happens to everything else.
For the most part, you write off travel expenses the same way you write off everything else. As long as it’s ordinary and necessary, you can add it to your tax deductions list.