How to deduct business travel on taxes?
Self-employed employees may often incur out of town business expenses and will be able to deduct these business travel expenses on their tax return. The tax treatment of these business travel expenses would be the same for an employee with unreimbursed travel costs, but the deduction would be a miscellaneous itemized deduction. This business expenses deduction would be subject to the 2%-of-adjusted-gross-income floor. Depending on other tax information, the taxpayer may not be able to take these deductions.
Overnight Stay Requirement for Business Travel
Before discussing the rules in depth, it is important to note that these rules only apply if the business conducted out of town reasonably requires an overnight stay by the tax. Someone would not be able to take a business travel expense deduction from a trip in their own town. Only the actual costs associated with the trip are deductible for out-of-town business trips. Taxpayers are are also allowed to deduct the cost of meals and lodging. Remember the 50% limitation on deducting meal expenses.
50% Meal Deduction Limitation
Meals are deductible even if they are “personal,” i.e., not connected with business, although, as with all deductible meals, only 50% of the cost is allowed. There is a special 80% for long-haul truckers, certain airline, train and bus employees, and certain merchant mariners. The IRS understands that eating away from home is more expense and allows taxpayers a break even though they would ordinarily need to have meals when they are at home. Meal expenses by an employee during a business trip and reimbursed to that employee are still only deductible at 50%, even though the employee was reimbursed 100% for the cost of the meals.
Additionally, no deduction is allowed for meal or lodging expenses that are “lavish or extravagant.” This would not allow an unreasonable deduction for a very fancy restaurant at an absurd price. The IRS could determine what is reasonable by looking at income and comparing the cost of the meals to that income in order to determine if they were reasonable for the business expense deduction.
Personal entertainment costs on the trip are not tax deductible
An important point to remember is that personal entertainment costs on the trip are not tax deductible. There is fine line between personal expenses and business related expenses. Business-related costs such as for dry-cleaning, phone calls, and computer rentals are fully deductible as part of the cost of out of town travel. Entertainment expenses for spouses may be deductible. Can you deduct the cost of entertainment for your spouse or a customer or client’s spouse? Maybe. You can only deduct these costs if you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. For example, you would be able to deduct otherwise permissible entertainment expenses of an out-of-town client’s husband when it is impracticable to entertain the client for business purposes without him.
Personal Trips and Business Trip Tax Deductions
Taxpayers cannot take a vacation and deduct that. If part of the trip is personal, the taxpayers must allocate what percentage of the trip is related to business and what part of the trip is related to personal use. If the trip is “primarily” business, the travel cost can be deducted in its entirety and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible. The IRS will use many factors to determine the exact nature of the trip. The IRS might check why you were traveling somewhere in order to prevent a taxpayer from deducting a vacation in disguise.
Deducting the Cost of out-of-town Business Travel
It is important to save all receipts from a business trip in case they are needed to substantiate the business travel deduction upon audit.
No tax deduction is allowed for a spouses business travel
Remember, no deduction is allowed for a spouses business travel unless they are an employee of yours or your company and her travel is also for a business purpose. Finally, personal expenses you incur at home as a result of taking the trip aren’t deductible. For example, the cost of paying someone to feed your fish cannot be deducted.