Business Travel Tax Deductions: What You Should Know
The tax code is far from a pleasure read, but when it comes to claiming business travel expenses, you need to be prepared.
At several thousand pages long, it’s no wonder that most people are averse to the tax code. However, when it comes to claiming business travel expenses, it’s important to do your homework so that you’re prepared to deduct your travel expenses before it’s time to file.
Being prepared means that you’re saving any necessary receipts and documentation, and not wasting time tracking business expenses that you may not need. Not only will understanding the way claiming business travel deductions works help you at tax time, it can also help you maximize your budget when planning future trips.
What is a Business Travel Tax Deduction?
Some people think that a tax deduction is an amount taken off their tax bill after other calculations are done. This is not true.
A tax deduction is an amount taken off an individual’s or business’ taxable income. If a person earns $100,000 per year and has $18,000 in deductible expenses, then that person’s taxes will be calculated on an $82,000 income, rather than $100,000.
Types of Business Travel Tax Deductions
There are two ways that deductions can be applied to income. There is a standard deduction and an itemized deduction. Every individual is entitled to take one of these deductions, regardless of income or expenses.
As of the 2018 tax year, the standard deduction was raised to $12,000. For many individuals, this is the best deduction to apply to their income because they don’t have more than $12,000 worth of individual deductions. However, for people who do a lot of business travel, it may be better to take an itemized deduction.
To claim itemized deductions, you'll have to keep track of your expenses throughout the year. You should keep all the receipts from your trips or use an app or similar program which tracks your spending. It is also a good idea to use credit cards instead of cash, as any transaction records may come in handy.
Now that you understand exactly what a tax deduction is, we can discuss how they relate to business travel.
Claiming Tax Deductions for Business Travel Within the U.S.
There are extensive rules limiting what can and can’t be deducted when it comes to domestic business travel. One of the main principles of business travel is that you can only claim a travel expense if it directly relates to your business purpose.
Transportation expenses include any plane, train, or bus fare, as well as car rentals, taxi services, or airport limo fees.
Transportation expenses for business travel are deductible — as long as the primary purpose of the trip is business.
For example, imagine you’re traveling to Seattle for a vacation. While there, you plan on taking a client to lunch. In this situation, your transportation costs to Seattle are not deductible, since the primary purpose of the trip is personal.
On the other hand, if you are traveling to Seattle for a week for business and take one day to visit family, you could claim your airfare to and from Seattle as a business expense. Just remember that the portion of the trip that was for personal purposes would not count as a business deduction. If you took your parents to lunch, you couldn’t claim that meal as a business expense.
If you are using your own vehicle or a rental car when traveling away from home, you can claim gas, tolls, and parking as a tax deduction. However, regular daily commuting to and from the office is not included.
If business travel requires an overnight stay, lodging expenses can be claimed as a travel expense on your taxes. Lodging taxes are also covered.
Business travel meals are deductible at a rate of 50%. This includes food, beverages, taxes, and tip. The IRS states that meals cannot be “lavish and extravagant”, although it doesn’t clearly define how it makes that determination. It does say that “An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances.” You’ll have to use your best judgment when dining out.
The IRS also doesn’t have any cut and dry rules when it comes to alcoholic beverages. So it’s up to you whether you want to try to deduct that glass of wine from your tax return.
The rules on claiming business expenses on meals for employees subject to “hours of service” limits are a little different. These employees are generally employed under the Department of Transportation or Federal Aviation Administration. They include truck drivers, pilots, airline crew, air traffic control, and railroad employees.
For safety reasons, these employees have limits placed on their travel, requiring them to get some rest between shifts. Since they’re not allowed to travel during their off-hours, they’re required to spend more time away from home. As a result, their meals are subject to an 80% tax deduction rate rather than 50%.
As of 2018, entertainment expenses are no longer deductible. This includes events like concerts, films, comedy shows, and sporting events. If you purchase food at an entertainment event separately (e.g., hotdogs at a ball game) the food expenses are still deductible at the standard 50% rate.
Tips for food, lodging, and travel services can all be claimed as business travel expenses.
Claiming Tax Deductions for Conference Travel Within the U.S.
Travel expenses for attending a convention or conference within the United States can be claimed as a tax deduction. These expenses include travel, lodging, and meals. You must be able to show that attending the conference benefits your business.
Any nonbusiness expenses, such as sightseeing, will not be deductible.
For conventions held outside of North America, the convention must be directly related to your business. Also, there must be a reasonable cause to hold the convention outside of North America. If most of the convention’s attendees live overseas, that may qualify.
If you are traveling outside the U.S. for personal reasons and attend a conference during your trip, the registration fee will be deductible. However, travel to and from the destination country will not be a business travel tax deduction.
Claiming Tax Deductions for Business Travel Outside the U.S.
The rules for business travel outside of the U.S. are a little more complicated. The IRS understandably doesn’t want people deducting their vacations as business expenses.
If international travel is entirely for business purposes, then your travel expenses (airfare, cabs to and from hotels, etc.) are deductible as business expenses. The trip qualifies as “entirely for business purposes” if it meets one of the following exceptions:
- If you have “no substantial control” over the travel destination. If you were sent out of the country by an employer that you are not related to, and you are not a managing executive, then you do not have “substantial control”. This will qualify the trip as entirely for business purposes.
- If you are outside of the country for less than one week. For this calculation, the day you leave the U.S. doesn’t count, but the day you return does.
- If you spend less than 25% of the trip on personal activities.
- If you can prove that vacation was not a substantial consideration in making your travel plans.
Here’s an example: you’re traveling out of the U.S. for 6 days, which means you meet the “less than one week” exception. Your airfare is a tax-deductible business expense. But on one of your travel days, you take a personal sightseeing trip. You can’t deduct the expenses from that personal day.
If your travel is not considered “entirely for business purposes”, you must determine what percentage of your trip was business and what percent was personal. Then you can apply that ratio to your airfare or travel costs. If you spent 40% of your travel time on business, then you can claim a tax deduction for 40% of your airfare costs.
One important note about business travel deductions — if you’re reimbursed for your expenses by your employer, you do not also get to file a deduction. Instead, the employer will get to take that deduction. You will not have to pay income tax on those reimbursements.
Growing your business, making the most of your investment, and understanding tax implications is complicated — If you have any questions about taxes, always reach out to a tax professional!