What You Need to Know about Publication 463 and Business Travel
tl;dr: A simple guide to the tax code on business expenses related to travel, meals, and gifts for solopreneurs and corporate road warriors.
If learning federal tax code weren't difficult, then everyone would do their own accounting and CPAs would be out of the job. If you travel for work, however, knowing some basic tax rules, particularly those outlined in IRS Publication 463, can come in handy. IRS Publication 463 sets the tax guidelines for common business expenses, like those incurred during travel.
At Lola.com we help companies of all sizes simplify their business travel. We put together this guide to demystify Publication 463 so that you, your employees, and/or your colleagues can expense business-related purchases with confidence while traveling. In this guide you'll learn:
- What IRS Publication 463 is and how it affects businesses,
- What businesses and business travelers need to know about Publication 463 and extended travel,
- The latest changes to Publication 463 (as of the 2018 tax year), and
- How to use Publication 463 in corporate travel management
Travel on, road warriors!
What is IRS Publication 463 and how does it affect your business?
IRS Publication 463 is a set of tax guidelines that dictate:
- Which travel, dining, and gift expenses are tax deductible,
- How to report these expenses on tax returns,
- Which records you must keep to prove these purchases, and
- How to handle reimbursements for these expenses.
Publication 463 applies to sole proprietors and employees of businesses who make relevant purchases on behalf of their employer, but do not get reimbursed for their expenses. Publication 463 does not apply to companies that reimburse employees for business expenses. Businesses that reimburse employees for company expenses should refer to chapter 11 of IRS Publication 535.
IRS Publication 463 affects businesses by setting rules for what can and cannot count as deductible business expenses on tax returns. These guidelines help deter fraud, such as company credit card holders taking themselves out to lavish meals and deducting them as business expenses. The rules also help companies create corporate travel policies by setting guidelines and benchmarks for spending.
Entrepreneurs and employees often wonder if they have to pay more in taxes due to IRS Publication 463. The answer is no. Publication 463 explains which business expenses can be taken as deductions. A deduction reduces pre-tax earnings, which reduces overall tax burden.
We’ll explain this concept by using a sole proprietor in our example, because a sole proprietor’s business earnings pass through to their personal income tax returns.
Let’s say that Joel is a marketing consultant. In 2018 his consulting business earned $175,000 in revenue. Joel had to travel around the world to perform his services and see clients, so he spent $25,000 on business travel, dining, and car expenses in 2018. If that entire sum of $25,000 were tax deductible, then Joel would deduct it from his total revenue ($175,000-$25,000) and his 2018 revenue after expenses would be $150,000. Joel would be taxed on his $150,000 profit instead of his $175,000 revenue, which would put him in a lower tax bracket and therefore reduce his tax burden.
Publication 463 sets the rules for which business-related travel, meal, and gift purchases sole proprietors and employees can deduct from their taxes. Deductible business expenses help reduce the tax burden for the self-employed and unreimbursed employees.
What businesses need to know about IRS Publication 463 and extended travel
A question that we get asked repeatedly by our customers is how the one-year rule for travel in Publication 463 has changed how business travel is managed. We’ll provide some context before we delve into this FAQ.
When people travel for work, they can deduct work-related travel expenses such as meals and lodging. What happens if someone gets sent to a location for work for an extended period of time. Can they deduct a hotel stay and meals indefinitely?
Publication 463 states that as long as the work-related travel is “realistically expected to last one year or less,” and the location of travel is not the person’s tax home, then this is considered travel and that employee can deduct related travel expenses.
However, if the employee stays in this location indefinitely or for more than a year and it becomes their tax home, then travel expenses like lodging, transportation, meals, etc. can’t be deducted from taxes while they’re in that location.
This rule prevents businesses from lowering their tax burdens by deducting their employees’ living expenses from their revenue by falsely claiming the expenses were made while traveling.
The one-year rule affects how business travel is managed in different ways depending on whether the business in question is a sole proprietorship or a corporation:
- Sole proprietorship: Sole proprietors might take advantage of the generous limitations of the one-year rule and move to an area where clients are based for less than a year for a relevant assignment and deduct all of these expenses to lower their tax burden.
- Corporation: If a large company were to do the above, they would essentially be paying for their employee’s life expenses. This lowers the company’s tax burden, but it doesn’t make good business sense because the business then doesn’t have that money to use on other things. It would make more sense for a business to relocate an employee who was constantly traveling to the same place for a project, so that the employee would cover their own living expenses.
The one-year travel rule has tax advantages for sole proprietors.
2018 tax year changes and updates to Publication 463
Publication 463 is amended slightly every year. What additions have been made to Publication 463 this year? These are the latest changes to the business expense deduction rules for the 2018 tax year:
- Entertainment expenses are no longer tax deductible. For example, you can no longer take clients to a concert and deduct that as a business expense.
- The standard mileage rate for 2018 tax year is 54.5 cents, which is a one cent increase from the previous year.
- Depreciation limits, allowances, and Section 179 deductions for vehicles have changed.
- The Tax Cuts and Jobs Act of 2017 got rid of itemized deductions for employees who don’t get reimbursed for business expenses. Instead, companies can set up accountable plans to reimburse employees.
While the change to the entertainment rule means entrepreneurs and employees can no longer take clients or colleagues out to shows or games, businesses can still benefit from the changes made to Publication 463. The higher mileage rate means a higher tax deduction for car travel in 2018 versus 2017. Furthermore, thanks to accountable plans, businesses can deduct their employees’ travel expenses and therefore lower their tax burdens.
Will the changes to Publication 463 affect how business travel is managed? Maybe yes, maybe no. Businesses will likely no longer allow their traveling employees to count entertainment as a business expense. Companies and sole proprietors may also change their rules for using company cars for travel. The accountable plan rules may incentivize companies to reimburse employees for travel and incidental expenses.
How Publication 463 affects corporate travel management
We are focused on all things business travel, here at Lola.com, including how tax guidelines like Publication 463 affect business travel and its management.
So how does IRS Publication 463 impact corporate travel overall? The rules help inform companies’ corporate travel policies, which set guidelines for things like car expenses and mileage rate reimbursement, per diem rates for meals and lodging, etc. Publication 463 also keeps business spending in check so that companies and entrepreneurs don’t take advantage of the tax system and spend all of their revenue on lavish travel and entertainment to reduce their profits, and therefore their tax burden.
While Publication 463 can seem like a bureaucratic document full of jargon and rules, it actually makes managing travel easier. The tax code helps entrepreneurs and companies set the framework for spending guidelines for travel. Publication 463 creates benchmarks for spending on travel expenses, meals and entertainment expenses, etc. so that businesses can stay on track and avoid tax evasion. The IRS document has also led to the creation of travel expense tracking tools that wouldn’t exist if these purchases weren’t deductible. For example, we now have tools like Everlance for tracking car mileage, and Expensify for tracking travel purchases.
Solepreneurs and employees can use Publication 463 to aid their business travels. The IRS document serves as a guide to ensure that business travelers are deducting expenses properly to avoid getting audited. Publication 463 also gives business travelers choices between how to travel. They can choose between deducting car expenses and the standard mileage rate versus taking an Uber or taxi. Publication 463 also gives travelers flexibility while deducting meals while on the road; they can track food spending using actual costs or the per diem standard set by the GSA. For example, the daily allowance for meals and incidental expenses while traveling to New York City as set by federal guidelines is $76.
Publication 463 is a useful tool for helping corporate travel managers set company guidelines for deducting business expenses. It also helps solopreneurs understand what they can and cannot deduct on their taxes, and provides guidelines for the most advantageous - and legal - ways to lower their tax burdens.
Tax code is confusing, but business travel and related expensing should be easy. Lola.com simplifies booking and managing business travel for solopreneurs and businesses of all sizes. Our Expensify integration makes filing expense reports and deductions easy.