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Even though we advise against exploiting this deduction, we do want you to understand how to leverage the process to save on your taxes, and get some R&R while you’re at it. Follow the steps in this tax deduction guide to learn exactly what qualifies as a travel expense, and how to not cross the line.
The travel needs to qualify as a “business trip”
Unfortunately, you can’t just jump on the next plane to the Bahamas and write the trip off as one giant business expense. To write off travel expenses, the IRS requires that the primary purpose of the trip needs to be for business purposes.
Here’s how to make sure your travel qualifies as a business trip.
1. You need to leave your tax home
Your tax home is the locale where your business is based. Traveling for work isn’t technically a “business trip” until you leave your tax home for longer than a normal work day, with the intention of doing business in another location.
2. Your trip must consist “mostly” of business
The IRS measures your time away in days. For a getaway to qualify as a business trip, you need to spend the majority of your trip doing business.
For example, say you go away for a week (seven days). You spend five days meeting with clients, and a couple of days lounging on the beach. That qualifies as business trip.
But if you spend three days meeting with clients, and four days on the beach? That’s a vacation. Luckily, the days that you travel to and from your location are counted as work days.
3. The trip needs to be an “ordinary and necessary” expense
“Ordinary and necessary” is a term used by the IRS to designate expenses that are “ordinary” for a business, given the industry it’s in, and “necessary” for the sake of carrying out business activities.
If there are two virtually identical conferences taking place—one in Honolulu, the other in your hometown—you can’t write off an all-expense-paid trip to Hawaii.
Likewise, if you need to rent a car to get around, you’ll have trouble writing off the cost of a Range Rover if a Toyota Camry will get you there just as fast.
What qualifies as “ordinary and necessary” can seem like a gray area at times, and you may be tempted to fudge it. Our advice: err on the side of caution. if the IRS chooses to investigate and discovers you’ve claimed an expense that wasn’t necessary for conducting business, you could face serious penalties.
4. You need to plan the trip in advance
You can’t show up at Universal Studios, hand out business cards to everyone you meet in line for the roller coaster, call it “networking,” and deduct the cost of the trip from your taxes. A business trip needs to be planned in advance.
Before your trip, plan where you’ll be each day, when, and outline who you’ll spend it with. Document your plans in writing before you leave. If possible, email a copy to someone so it gets a timestamp. This helps prove that there was professional intent behind your trip.
The rules are different when you travel outside the United States
Business travel rules are slightly relaxed when you travel abroad.
If you travel outside the USA for more than a week (seven consecutive days, not counting the day you depart the United States):
You must spend at least 75% of your time outside of the country conducting business for the entire getaway to qualify as a business trip.
If you travel outside the USA for more than a week, but spend less than 75% of your time doing business, you can still deduct travel costs proportional to how much time you do spend working during the trip.
For example, say you go on an eight-day international trip. If you spend at least six days conducting business, you can deduct the entire cost of the trip as a business expense—because 6 is equivalent to 75% of your time away, which, remember, is the minimum you must spend on business in order for the entire trip to qualify as a deductible business expense.
But if you only spend four days out of the eight-day trip conducting business—or just 50% of your time away—you would only be able to deduct 50% of the cost of your travel expenses, because the trip no longer qualifies as entirely for business.
List of business travel expenses
Here are some examples of business travel deductions you can claim:
- Plane, train, and bus tickets between your home and your business destination
- Baggage fees
- Laundry and dry cleaning during your trip
- Rental car costs
- Hotel and Airbnb costs
- 50% of eligible business meals
- 50% of meals while traveling to and from your destination
Travel
On a business trip, you can deduct 100% of the cost of travel to your destination, whether that’s a plane, train, or bus ticket. If you rent a car to get there, and to get around, that cost is deductible, too.
Lodging
The cost of your lodging is tax deductible. You can also potentially deduct the cost of lodging on the days when you’re not conducting business, but it depends on how you schedule your trip. The trick is to wedge “vacation days” in between work days.
Here’s a sample itinerary to explain how this works:
Thursday: Fly to Durham, NC.
Friday: Meet with clients.
Saturday: Intermediate line dancing lessons.
Sunday: Advanced line dancing lessons.
Monday: Meet with clients.
Tuesday: Fly home.
Thursday and Tuesday are travel days (remember: travel days on business trips count as work days). And Friday and Monday, you’ll be conducting business.
It wouldn’t make sense to fly home for the weekend (your non-work days), only to fly back into Durham for your business meetings on Monday morning.
So, since you’re technically staying in Durham on Saturday and Sunday, between the days when you’ll be conducting business, the total cost of your lodging on the trip is tax deductible, even if you aren’t actually doing any work on the weekend.
It’s not your fault that your client meetings are happening in Durham—the unofficial line dancing capital of America.
Meals and entertainment during your stay
Even on a business trip, you can only deduct a portion of the meal and entertainment expenses that specifically facilitate business. So, if you’re in Louisiana closing a deal over some alligator nuggets, you can write off 50% of the bill.
Just make sure you make a note on the receipt, or in your expense-tracking app, about the nature of the meeting you conducted—who you met with, when, and what you discussed.
On the other hand, if you’re sampling the local cuisine and there’s no clear business justification for doing so, you’ll have to pay for the meal out of your own pocket.
Meals and entertainment while you travel
While you are traveling to the destination where you’re doing business, the meals you eat along the way can be deducted by 50% as business expenses.
This could be your chance to sample local delicacies and write them off on your tax return. Just make sure your tastes aren’t too extravagant. Just like any deductible business expense, the meals must remain “ordinary and necessary” for conducting business.
How Bench can help you take advantage of your business tax deductions
Surprised at the kinds of expenses that are tax-deductible? Travel expenses are just one of many unexpected deductible costs that can reduce your tax bill. But with messy or incomplete financials, you can miss these tax saving expenses and end up with a bigger bill than necessary.
Enter Bench, America’s largest bookkeeping service. With a Bench subscription, your team of bookkeepers imports every transaction from your bank, credit cards, and merchant processors, accurately categorizing each and reviewing them for hidden tax deductions. We provide you with complete and up-to-date bookkeeping, guaranteeing that you won’t miss a single opportunity to save.
Want to talk taxes with a professional? Bench also offers self-employed individuals small business tax services including unlimited consultations with our tax professionals. They can help you identify deductions, find unexpected opportunities for savings, optimize your tax structure, and ensure you’re paying the smallest possible tax bill. Learn more.
Bringing friends & family on a business trip
Don’t feel like spending the vacation portion of your business trip all alone? While you can’t directly deduct the expense of bringing friends and family on business trips, some costs can be offset indirectly.
Driving to your destination
Have three or four empty seats in your car? Feel free to fill them. As long as you’re traveling for business, and renting a vehicle is a “necessary and ordinary” expense, you can still deduct your business mileage or car rental costs even when others join you for the ride.
One exception: If you incur extra mileage or “unnecessary” rental costs because you bring your family along for the ride, the expense is no longer deductible because it isn’t “necessary or ordinary.”
For example, let’s say you had to rent an extra large van to bring your children on a business trip. If you wouldn’t have needed to rent the same vehicle to travel alone, the expense of the extra large van no longer qualifies as a business deduction.
Renting a place to stay
Similar to the driving expense, you can only deduct lodging equivalent to what you would use if you were travelling alone.
However, there is some flexibility. If you pay for lodging to accommodate you and your family, you can deduct the portion of lodging costs that is equivalent to what you would pay only for yourself.
For example, let’s say a hotel room for one person costs $100, but a hotel room that can accommodate your family costs $150. You can rent the $150 option and deduct $100 of the cost as a business expense—because $100 is how much you’d be paying if you were staying there alone.
This deduction has the potential to save you a lot of money on accommodation for your family. Just make sure you hold on to receipts and records that state the prices of different rooms, in case you need to justify the expense to the IRS
Heads up. When it comes to AirBnB, the lines get blurry. It’s easy to compare the cost of a hotel room with one bed to a hotel room with two beds. But when you’re comparing significantly different lodgings, with different owners—a pool house versus a condo, for example—it becomes hard to justify deductions. Sticking to “traditional” lodging like hotels and motels may help you avoid scrutiny during an audit. And when in doubt: ask your tax advisor.
So your trip is technically a vacation? You can still claim any business-related expenses
The moment your getaway crosses the line from “business trip” to “vacation” (e.g. you spend more days toasting your buns than closing deals) you can no longer deduct business travel expenses.
Generally, a “vacation” is:
- A trip where you don’t spend the majority of your days doing business
- A business trip you can’t back up with correct documentation
However, you can still deduct regular business-related expenses if you happen to conduct business while you’re on vacay.
For example, say you visit Portland for fun, and one of your clients also lives in that city. You have a lunch meeting with your client while you’re in town. Because the lunch is business related, you can write off 50% of the cost of the meal, the same way you would any other business meal and entertainment expense. Just make sure you keep the receipt.
Meanwhile, the other “vacation” related expenses that made it possible to meet with this client in person—plane tickets to Portland, vehicle rental so you could drive around the city—cannot be deducted; the trip is still a vacation.
If your business travel is with your own vehicle
There are two ways to deduct business travel expenses when you’re using your own vehicle.
- Actual expenses method
- Standard mileage rate method
Actual expenses is where you total up the actual cost associated with using your vehicle (gas, insurance, new tires, parking fees, parking tickets while visiting a client etc.) and multiply it by the percentage of time you used it for business. If it was 50% for business during the tax year, you’d multiply your total car costs by 50%, and that’d be the amount you deduct.
Standard mileage is where you keep track of the business miles you drove during the tax year, and then you claim the standard mileage rate.
Where to claim your travel expenses tax deduction
If you’re self-employed, you’ll claim travel expenses on Schedule C, which is part of Form 1040.
The cost of breaking the rules
Don’t bother trying to claim a business trip unless you have the paperwork to back it up. Use an app like Expensify to track business expenditure (especially when you travel for work) and master the art of small business recordkeeping.
If you claim eligible write offs and maintain proper documentation, you should have all of the records you need to justify your deductions during a tax audit.
Speaking of which, if your business is flagged to be audited, the IRS will make it a goal to notify you by mail as soon as possible after your filing. Usually, this is within two years of the date for which you’ve filed. However, the IRS reserves the right to go as far back as six years.
Tax penalties for disallowed business expense deductions
If you’re caught claiming a deduction you don’t qualify for, which helped you pay substantially less income tax than you should have, you’ll be penalized. In this case, “substantially less” means the equivalent of a difference of 10% of what you should have paid, or $5,000—whichever amount is higher.
The penalty is typically 20% of the difference between what you should have paid and what you actually paid in income tax. This is on top of making up the difference.
Ultimately, you’re paying back 120% of what you cheated off the IRS.
If you’re slightly confused at this point, don’t stress. Here’s an example to show you how this works:
Suppose you would normally pay $30,000 income tax. But because of a deduction you claimed, you only pay $29,000 income tax.
If the IRS determines that the deduction you claimed is illegitimate, you’ll have to pay the IRS $1200. That’s $1000 to make up the difference, and $200 for the penalty.
Form 8275 can help you avoid tax penalties
If you think a tax deduction may be challenged by the IRS, there’s a way you can file it while avoiding any chance of being penalized.
File Form 8275 along with your tax return. This form gives you the chance to highlight and explain the deduction in detail.
In the event you’re audited and the deduction you’ve listed on Form 8275 turns out to be illegitimate, you’ll still have to pay the difference to make up for what you should have paid in income tax—but you’ll be saved the 20% penalty.
Unfortunately, filing Form 8275 doesn’t reduce your chances of being audited.
Getting professional tax support is easier than you think
When it comes to taking advantage of the tax write-offs we’ve discussed in this article—or any business tax write-offs, for that matter—the support of a professional bookkeeping team and a trusted CPA is essential.
Accurate financial statements will help you understand cash flow and track deductible expenses. And beyond filing your taxes, a CPA can spot deductions you may have overlooked, and represent you during a tax audit.
Learn more about how to find, hire, and work with an accountant. And when you’re ready to outsource your bookkeeping and tax filing, try Bench.
