From business trips to working vacations: When to deduct travel expenses
On the spectrum of mixing business travel with pleasure, the “working vacation” falls on one end while a business trip spent almost entirely in a conference room lands at the other end. So in this grayscale of business and personal expenses, where does the tax benefit of business expenses for travel end and a personal vacation begin?
Just because a taxpayer incurs an expense while traveling for business does not automatically mean it is deductible. The important point is: taxpayers can only deduct business-travel expenses that are ordinary and necessary.
To break it down further:
- Business-travel expenses are incurred for a business purpose and are not personal expenses for enjoyment or entertainment.
- Ordinary expenses are common and accepted in the trade or business.
- Necessary expenses are helpful and appropriate for the trade or business.
|TYPE OF EXPENSE||DEDUCTIBLE COST|
|Transportation||Travel by airplane, train, bus or car between taxpayer’s tax home and business destination. If taxpayer was provided with a ticket or is traveling at no cost as a result of a frequent traveler or similar program, the deductible cost is zero.|
|Taxi, commuter bus, airport limousine||Fares that take the taxpayer between the airport or station and hotel and between the hotel and the work location of the taxpayer’s customers or clients, business meeting place or temporary work location.|
|Car||Operating and maintaining a car when traveling away from home on business. The taxpayer can deduct actual expenses (including fuel) or the standard mileage rate as well as business-related tolls and parking. If the taxpayer rents a car while away from home on business, he or she can deduct only the business-use portion of the expenses.|
|Lodging and meals||Lodging and meals if the business trip is overnight or long enough that the taxpayer needs to stop for sleep or rest to properly perform his or her duties. Meals include amounts spent for food, beverages, taxes and related tips.|
|Cleaning||Dry cleaning and laundry while away from home on business.|
|Internet charges||Hotel internet connection charges while on a business trip. This includes use of fax machines or other communication devices.|
|Tips||Tips paid for any of these expenses.|
|Other||Other similar ordinary and necessary expenses related to the taxpayer’s business travel. These expenses might include transportation to or from a business meal and equipment rental fees.|
Add some vacation to a business trip but divvy up expenses
Taxpayers can deduct their travel expenses when their trip is entirely business related. If the taxpayer is on a domestic business trip and made personal side trips or stayed longer than the business purpose required, the taxpayer may still deduct the cost of travel between tax home and business destination, as well as expenses related to the business portion of the trip. Any portion of the trip related to personal activities is not deductible.
For example, a taxpayer travels from his tax home in Kansas City to San Francisco to meet with a client Wednesday through Friday. He stays with a friend in the city on Saturday and Sunday. The expenses he incurred to get to and from San Francisco and the first three days of the trip may be deductible business expenses. His personal activities on Saturday and Sunday cannot be included in the deduction.
Deduct only the “working” part of the working vacation
On the other end of the spectrum, if a trip is primarily for personal activities, such as a vacation, then the only deductible business expenses are those incurred at the destination that are directly related to the trade or business. None of the expenses for traveling to the destination are deductible.
For example, a taxpayer who spends a couple hours a day working from his computer while on vacation may be able to deduct business-related expenses like Internet connection fees.
Taxpayers must keep detailed records to claim a deduction
Taxpayers have to prove their business expenses are legitimate. A deduction can be denied if it isn’t substantiated. Taxpayers should keep adequate records and documentary evidence of:
- the amount of the expense,
- the time and place and
- the business purpose.
Employees and the self-employed have different deduction thresholds
Employees can only deduct unreimbursed business expenses above a certain threshold. So if their employer reimbursed them for a business trip, taxpayers cannot deduct any of those expenses. If they do have unreimbursed business-related expenses and they itemize deductions, the employee can deduct them along with other miscellaneous expenses that exceed 2 percent of their adjusted gross income (AGI).
The self-employed claim their business expenses on Schedule C and generally do not have any limitation on the business expenses they can deduct.
In recent years, the line between business and personal have blurred, making it difficult for taxpayers to navigate the rules for deducting business-travel expenses, to say nothing of the special rules for international travel and cruises. For extra guidance, taxpayers should consult a trusted tax professional.
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