Many business-related travel expenses are tax deductible. Your clients who are self-employed or have small businesses and incur (or their employees incur) business travel expenses will need your guidance to help them keep records of their expenses so that they can reduce their taxes.
What is business travel?
Business travel is defined as travel away from home for the purpose of conducting business-related activities. According to the IRS, a person is traveling away from home if:
- duties require the person to be away from the general area of his/her tax home substantially longer than an ordinary day’s work, and
- the person needs to sleep or rest to meet the demands of his/her work while away from home.
Commuting to and from the primary place of work is not considered business travel, even if it is a long commute; thus, commuting costs are non-deductible. But if an airline pilot flies to a distant city, has a 6-hour stopover, and rents a room to take a rest to prepare for his long flight home, the cost of the room would be a deductible business expense.
Deductible travel expenses include:
- Transportation: plane, bus, train, auto between home and business destination. This would include shuttles to and from the airport, auto rental, taxi fares, tolls, parking, and other travel expenses. If your client’s costs were partially reimbursed, the transportation deduction would only be the unreimbursed portion.
- Baggage and shipping of business materials, such as those needed for an industry conference
- Lodging and non-entertainment-related meals. Meals include any costs for food, beverage, taxes, and tips. Percentage limitations apply, depending on when the costs were incurred and whether they are considered lavish or extravagant.
- Dry cleaning and laundry
- Convention and tradeshow expenses that directly relate to work or business
- Tips for anything deductible
- Telephone and communication expenses incurred due to travel
- Other ordinary and necessary business expenses, such as equipment rental fees or necessary services, such as a stenographer or interpreter
These deductions are only for the person carrying out business duties, not for anyone who may happen to join your client. For instance, if your client is flying to another city for a few days for work and her husband joins her on the trip, only her flight and her meals would be deductible. If a single room costs $150 but the double they got costs $200, she would only be able to deduct $150. However, if she drove, she would still be able to deduct the full mileage allowance, since having another passenger does not increase the cost of travel.
Your client needs to retain receipts in order to demonstrate the expense. Hotel bills should be itemized, because certain fees, such as use of the gym or room service fees, would not be deductible. As in the example given of your client bringing her husband on the trip, it would be best if your client ordered her flight tickets separately from her husband’s and requested separate checks for restaurant meals so that only her expenses would be on the receipts. This makes it easier for you and avoids questions if there is an audit.
If your client takes her whole family, the situation may be more complicated. If the trip remains primarily for business purposes and your client is able to track her business expenses carefully, she could still deduct them. However, if more than 25% of the trip is for personal reasons, for instance, the family decides to stay an extra few days to enjoy the sites, then by IRS standards the trip becomes a vacation. It is still possible for your client to deduct specific expenses involved with business while at the location, but she may lose her ability to deduct travel and food.
Make sure you know the particulars
Thoroughly read and understand the IRS rules so you are fully versed in any exceptions and limitations – such as the tax home being different from the family home; temporary assignments vs. indefinite assignments; and specifics regarding meal deductions. Discuss these particulars with your clients, preferably before travel expenses are incurred, in order to help your clients save as much of their hard-earned money as possible.