Tax Deductions for Travel Expenses: Guidelines for Small Business Owners

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Every business wants to cut down its tax liability. This is possible with efficient tax management and planning. One of the tools businesses use to limit their tax liability is to claim deductible business expenses.

Business trips are a fine example of such deductible expenses. And your next trip could be deductible - as long as it checks all the right boxes. Here’s a quick rundown of everything you need to know about deducting business travel expenses.

How to Qualify for Business Trip Deductions?

The IRS abides by a strict definition of what a ‘business trip’ is, and your trip needs to fit the bill to qualify for deductions.

1. The Primary Purpose of Travel Must Be Business

There must be a purpose to the trip and intent to conduct business while on the trip. Documenting this in advance by sending a mail to a colleague informing them of your trip is a good idea.

2. You Need to Travel Outside Your Tax Home

Your tax home is the location where you would normally do business. To meet this requirement, you must spend longer than one working day outside of this area.

3. Leisure Elements Must Be Mostly for Business

Your business trip doesn’t have to involve working all the time. You can take a few days off your busy schedule to relax as long as the trip was ‘mostly’ for business. The days on which you travel to and from the destination count as workdays.

4. Expenses Must Be ‘Ordinary and Necessary’

To justify that any expense was business-related, you need to be reasonable and prove that such expense was ‘ordinary and necessary’ to conducting business. For instance, you cannot justify renting a luxury car when a commuter vehicle or taxi would serve the same utility.

5. Document Your Agenda for Each Day in Advance

Before leaving for your work trip, make sure to have it planned well in advance and prepare an agenda for each day. While you’re traveling, keep all receipts you intend to write off for documentary proof in case of an audit.

If you do not have paperwork or proof to substantiate your business expense claims, you may not be eligible for deductions, or worse, you may have to pay the penalty for fraudulent claims.

Traveling Outside the United States? It’s a Little Different

When you’re traveling out of the United States, some rules are relaxed. You can get away with deducting expenses for travel abroad as long as 25% of the total time spent there was for business.

If you spent less than the stipulated 25% of your time abroad doing business, you could still claim deductions proportional to the time spent working.

For instance, if you’re going on a week-long trip to the United Kingdom, you need to spend at least 1.75 days working. This would enable you to claim the entire airfare of the trip as a business expense.

However, if you only spend a single day working on a week-long trip, you’ll only be able to claim 14% of the travel expenses.

Which Travel Expenses Are Deductible?

Here’s a list of all the travel expenses that you’re able to claim as a business expense.

  • Commuting costs via plane, train, bus, or car from your home to your destination
  • Baggage fees
  • Rental car and cab costs
  • Accommodation and lodging costs
  • 50% of business meals
  • 50% of meals while traveling to and from the destination

Can You Bring Friends and Family on Business Trips?

Like we pointed out earlier, you can take time out for leisure on your work trips. Naturally, you wouldn't want to do that alone and might prefer to bring a friend or family along. However, not all their expenses will count as deductible costs.

Here’s how some of it can be claimed:

  • Driving to Your Destination: You can only write off the expenses that you would incur while traveling alone. However, if you rent a car and have spare seats, feel free to bring friends and family along.
  • Saving on Lodging Options: Staying in a hotel that offers discounted rooms for larger occupancies is a great way to drive down costs. Many hotels only charge a marginally higher room rent for multi-occupancy rooms over single-occupancy rooms. Airbnbs are harder to justify as a business expense, though.

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Claiming Business-Related Expenses on Vacation

The IRS requires that the majority of time spent on trips within the country be work-related to qualify as a business trip.

That said, if your trip doesn’t qualify as a business trip and is a vacation, you can still deduct any business-related expenses. For instance, you could write off 50% of a meal you had with a client you met at your destination.

However, the cost of travel to and from the destination and other expenses that would have been covered if it were a business trip would not be deductible.

Traveling for Business With Your Vehicle

If you're traveling in your own vehicle for business purposes, you can claim the related expenses. You can document your travel in two ways:

  • Actual Expenses Method: Add all the vehicle-related costs you incurred over the tax year. Next, find the percentage of time the vehicle was used for business purposes and multiply the total cost by this percentage. This would be the amount deductible.
  • Standard Mileage Method: This method involves tracking the number of miles you drove for business and calculating the cost using the standard mileage rate for the specific tax year.

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Penalties for False Claims

If you’re looking to claim deductible business expenses, you should make sure to document receipts of all your expenditure. This will allow you to furnish proof of the amounts claimed to be deductible if the IRS conducts an audit.

It is not advisable to claim expenses that are not business-related as this could attract attention from the IRS. They may conduct a tax audit to ensure the veracity of these claims, and if the claims are found to be false, you would be penalized.

The IRS mandates that you pay the difference between the taxes you should have paid and what you paid as well as a 20% penalty over that.

To elaborate, let's assume that you owed $10,000 in taxes and only paid $9,000. If the IRS finds out, you would be liable to pay a total of $10,200. This final amount includes the difference and penalty of 20%.

How to Write off Business Travel Expenses

The self-employed can claim their business travel expenses under Schedule C of IRS Form 1040.

If you’re considering writing off business expenses and want to save on your tax liability, you should consider hiring a professional CPA who can help you manage and file your taxes. Hiring a professional means saving your business from overpaying taxes.  

You could also reach out to Fincent, a professional bookkeeping service dedicated to giving creative small businesses a prompt and seamless accounting experience. Find out how we can help you ensure the best financial health of your company.

Fincent: Your Business's Personal Financial Wizard - From Bookkeeping to Tax Filing

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