With a first or second shot in our arms, many of us are starting to feel an unaccustomed optimism about reopening. We’ve been locked indoors for a year and a half, and now, it finally looks like we may get a chance to get off our sofas and out the door. And while “travel is back” may be a bit of an overstatement, it seems like a good time to start thinking about getting mobile again. Business owners have several advantages when making the most of their travel, so today, I want to cover the basics about maximizing the value of business travel.
Don’t forget ordinary and necessary
Before we get specifically into travel, I want to revisit two essential words regarding business deductions — ordinary and necessary. These two words are at the center of how the IRS defines a business expense. But they may not mean what you think they do.
“Ordinary” in this context means the type of expense that a business like yours typically takes. For example, it’s common and accepted for tax preparers to pay for software, malpractice insurance, and continuing education. Because these are common and accepted in the profession, they are considered ordinary expenses.
However, this point can get very business-specific. It’s not ordinary for tax preparers to deduct breast implants as a business deduction. But for dancers at strip clubs? It’s another story. Even though my tax preparation business can’t deduct that expense, a stripper at the club in the city might.
The other part of the equation is necessary. I’m still unsure why the IRS uses this particular word since they mean “helpful and appropriate for your trade or business,” rather than mandatory or required as you might expect. As long as an expense is helpful, you can consider it a business expense.
Deducting business travel
For business travel specifically, deductible expenses are the ordinary and necessary expenses of traveling away from home for your business. Your “home,” in this case, is the entire city or general area where you work or have your principal place of business, and that may not necessarily be where you live. If you don’t have a regular or a principal place of business because of the nature of your work, then your tax home may be the place where you regularly live. You have to be away from your tax home for a period substantially longer than an ordinary day’s work, and you need to get sleep or rest to meet the demands of your work while away.
When figuring out your principal place of business, the IRS considers factors like the total time you ordinarily spend in each location, the level of your business activity in each site, and whether your income from each place is significant or insignificant.
Deductible travel expenses while away from home include, but aren’t limited to, the costs of:
- Travel by airplane, train, bus, or car between your home and your business destination. (If you’re provided with a ticket or you’re riding free as a result of a frequent traveler or similar program, your cost is zero.)
- Fares for taxis or other types of transportation between: (a) The airport or train station and your hotel, (b) The hotel and your customers’ work location, clients, business meeting place, or temporary work location.
- Shipping of baggage and sample or display material between your regular and temporary work locations.
- Using your car while at your business destination. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking fees. If you rent a car, you can deduct only the business-use portion for the expenses.
- Lodging and non-entertainment-related meals.
- Dry cleaning and laundry.
- Business calls while on your business trip. (This includes business communications by fax machine or other communication devices.)
- Tips you pay for services related to any of these expenses.
- Other similar ordinary and necessary expenses related to your business travel. (These expenses might include transportation to and from a business meal, public stenographer’s fees, computer rental fees, and operating and maintaining a house trailer.)
Instead of keeping records of your meal expenses and deducting the actual cost, you can generally use a standard meal allowance, which varies depending on where you travel. The deduction for business meals is generally limited to 50% of the unreimbursed cost, but for 2021 and 2022, you get to deduct 100% if you purchase the food from a restaurant. You can’t deduct expenses that are lavish or extravagant or for personal purposes.
See Publication 463 for additional details on what is and isn’t deductible.
Mixing business and personal travel
As I mentioned above, you can only deduct that are ordinary and necessary for business. However, knowing the rules around the travel deduction will allow you to leverage business vacations that also may have a bit of personal use.
Suppose you’re traveling within the United States to mix business and pleasure. In that case, you can deduct 100% of your travel expenses to and from the destination, as long as the trip is primarily related to your business. What makes a business trip “primarily related to your business?” As with your tax home determination, the IRS focuses on how much time you spend on each activity as a determining factor. Suppose you go away for ten days and spend seven days meeting with clients and a couple of days lounging by the pool. That qualifies as primarily a business trip, and you can deduct the total cost of getting to and from your destination.
You can also deduct lodging, 50% of meal costs (or potentially 100% for 2021 and 2022), and other qualified business expenses for the days you spend on business, but only to the extent that you would have incurred the costs if the trip had been totally for business. Travel days count as business days, as do weekends, holidays, or other standby days if they fall between days devoted to business, and it wouldn’t make sense to travel back home.
If, instead, you spend more time on pleasure than business (say seven days relaxing and three days seeing clients), none of your travel expenses to and from the destination would be considered deductible. But, you could write off any expenses you have at your destination that would qualify as business deductions. If, for example, while you’re visiting friends in Oregon, and while you’re there, you take a client out to lunch to discuss business, your transportation to and from the customer’s and the meal cost would qualify as a deductible business expense.
When staying over on Saturday night saves you on airfare, you may deduct 50% of meal costs, lodging, and other business-related expenses incurred for the additional night. That’s because the stay-over has a business purpose of cutting travel costs.
When your destination is abroad, you must allocate your travel expenses in proportion to the number of days you spend on business and personal activities. However, there are a few instances where the allocation rule doesn’t apply.
For example, if you are out of the country for seven consecutive days or less (not counting the day you left the U.S. but counting the day you return to the U.S.), then you don’t need to make the allocation. That means you can fly to Germany for a four-day meeting and sightsee for two days and deduct your travel expenses.
The allocation rule also doesn’t apply if you are out of the U.S. for more than a week but spent less than 25% of your time on personal activities. (In this situation, weirdly, both the day of your departure and the day of your return count as business days.) You’re also exempt from the allocation requirement if you have no substantial control over the arrangement of the trip.
If you travel outside the United States primarily for vacation, the entire cost of the trip is a nondeductible personal expense. But, if you spend some time attending professional seminars or a continuing education program, you can deduct your registration fees and other costs you have that are directly related to your business.
Other best practices
Document, document, document: Because the rules can be a bit convoluted and the amount of time you spend doing business and personal activities is so significant, it’s best to keep a log to substantiate your business activities. The record should include the dates of departure and return, the number of days spent on business, and the reason for the travel. In addition, it may be helpful to outline your trip and document your plans before you leave. This documentation can help prove the business purpose of the trip.
Bring the family along, but don’t deduct the personal expenses: You can drive to your business conference, take your family with you and deduct the total cost of the back-and-forth trip. You would have incurred these expenses regardless. If you decide to fly, only your airfare is deductible. You may also have to make some adjustments when you share your hotel room with family. You may only deduct the cost of what you would have paid for a single, rather than double, room. Typically, this is more than half the cost. Just remember that any incidental personal travel within the trip — visiting family or taking a side trip, for example — are nondeductible personal expenses.
Deductible doesn’t mean free: As always, remember that getting to deduct something as a business expense doesn’t make it free. You are still spending money. So make sure it’s money that you would have spent otherwise.