Travel Expense Deductions

Employees and the self-employed can deduct travel expenses under certain conditions. Expenses such as lodging and meals are only deductible if the trip lasts longer than 1 day. However, only 50% of meals and entertainment expenses are deductible. If the business trip lasts less than 1 day, then only transportation costs can be deducted, not meals. The self-employed can deduct all qualified expenses, but the unreimbursed travel expenses of an employee are not deductible, but the employer may reimburse the employee for those expenses from an accountable plan, which will not be taxable to the employee.

Commuting expenses to an outside office are not deductible. If a self-employed taxpayer has a home office as a principal place of business, then all business trips are deductible. Commuting expenses are deductible if the taxpayer is out of town on a business trip and must make trips to other areas in the locality. Additionally, a taxpayer that incurs costs to carry tools to work can deduct any additional costs required to transport the tools, such as renting a trailer. Travel expenses for going from one job location to another, either for the same employer or for different employers, are deductible if the taxpayer goes from one business site directly to the other without first going home.

Tax Home

To deduct meals and lodging expenses, the taxpayer must be working away from what the IRS defines as the tax home for the taxpayer, which is the usual place of business for the taxpayer, even if that place is far from the taxpayer's residence. So if a taxpayer lives in Philadelphia but works in Baltimore, then Baltimore is considered the taxpayer's tax home. If the taxpayer would then work in Philadelphia sometimes, this would be travel away from the tax home even though he lives in Philadelphia. If the taxpayer does not have a consistent place of work, the taxpayer's tax home is wherever the worker happens to be during that time.

If the taxpayer works in more than 1 location regularly, the tax home is considered the location of the principal business. The principal place of business is determined by these factors:

Because the tax home is a place of business or employment, a husband and wife can each have a separate tax home even if they live together. So the fact that the husband and wife work in 2 separate localities, even if they are widely separated, does not allow them to deduct travel costs even if they file jointly.

Tax law distinguishes between temporary and indefinite assignments to another location away from the tax home. Travel to and from the new location is deductible, but living costs are only deductible at temporary assignments. A temporary assignment is at a location where the duration of the assignment is reasonably expected to be 1 year or less. However, if the assignment is expected to last more than 1 year, then the assignment is indefinite and the location becomes the taxpayer's tax home even if the actual duration of the assignment turns out to be less than 1 year. Assignments are also considered indefinite if the work is probationary or if there are repeated discontinuous stays in the same area totaling more than 1 year.

If the taxpayer is assigned a location for less than 1 year, but, later, the employer asked the employee to stay longer, then the original duration will be treated as a temporary assignment, thus allowing living expenses to be deducted. However, the remaining time will be treated as the taxpayer's new tax home if the entire duration of the job exceeds 1 year.

On temporary assignment, meals and lodging are deductible even on days off. However, if the taxpayer goes home over the weekend or over some other time period, then the expenses while at home are not deductible, but the travel expenses, meals, and lodging en route between the home and assignment area are deductible up to the amount that the taxpayer would have claimed if he remained in the area.

In determining whether a work area is a temporary location, the IRS may consider whether the taxpayer took his family with him to the new location, but this is not necessarily determinative.

Temporary Place of Work

Commuting costs are deductible if the taxpayer has a regular place of work outside of the home or has a home office as the principal place of business but needs to travel to temporary job locations on particular days. A work location is considered temporary if the period of employment is realistically expected to last 1 year or less. Only the expectation matters, not the actuality. If the job location was expected to last more than 1 year, but it doesn't, it still is not considered a temporary location. However, if the taxpayer does not have a regular place of work, then none of the commuting costs are deductible. A taxpayer who does not have a regular place of work but works at several locations within the municipality or metropolitan area can only deduct costs of commuting to an area outside of the metropolitan area or between jobs sites. If all the jobs are outside of the area, the commuting costs are not deductible since the taxpayer can simply move to that area to eliminate the travel.

Federal Per Diem Rate for Meals and Lodging

The cost of meals and lodging are only deductible if the taxpayer is on a business trip lasting longer than 1 working day and requires time off to sleep before returning home. Meals are not deductible simply because the taxpayer is working overtime. If audited, the IRS may limit extravagant expenses to a reasonable amount.

Deductions based on federal per diem rates simplify substantiation requirements because receipts for individual expenses are not required for tax records. However, times, places, and business purpose for the travel must be substantiated.  The self-employed can use per diem rates for meals but not for lodging.

Rates are revised annually, usually around the beginning of October, after the end of the federal government's fiscal year. Special rules, not discussed here apply to workers in the transportation industry who are subject to the Department of Transportation hours of service limits, such as interstate truck drivers and pilots.

The taxpayer can claim an IRS meal allowance, called the M&IE per diem rate (for meals and incidental expenses). The M&IE rate includes tips for service people such as porters, and hotel maids, but does not include the cost of laundry, cleaning, or pressing of clothing, which can be deducted separately with the proper documentation. Self-employed individuals can claim the M&IE allowance, but employees may only claim the allowance if they are not reimbursed under an accountable plan, if their employer is not related to them, and if they do not own more than 10% of the employer's outstanding stock.

The per diem rate must be prorated on a quarter day for partial days of travel, starting at 12 midnight. So, if you arrive at 6 p.m. at your destination, then only 25% of the per diem rate can be claimed.

CONUS rates (CONterminous (or CONtinental) United States) apply to locations within the continental United States, and (OCONUS) rates (Outside of the CONterminous United States) apply for travel to Alaska, Hawaii, Puerto Rico, United States possessions, and foreign countries.

Rates apply for travel during the federal fiscal year, October 1 - September 30:

A simplified method to calculate per diem rates is the high-low substantiation method rates, so called because there are only 2 rates: a high rate that applies to high-cost localities listed by the IRS and a low rate that applies everywhere else in the US. These rates may only be used if applied to all payments to an employee for travel in the continental United States during the calendar year. Updated per diem rates are published annually by the IRS in notices. There is a limit on the total amount and a limit for the portion of that total that can be applied to meals and incidental expenses. Incidental expenses include fees and tips paid to baggage carriers, bellhops, hotel staff, porters, and staff on ships. Other miscellaneous expenses may be deductible but must be substantiated.

High-low per diem rates (per diem rates for meals and incidental expenses are part of the total):

Search terms for current rates: annual high-low substantiation rates for high-cost localities

If meals are not claimed on a particular day, but the taxpayer had other incidental costs, then instead of using actual costs, an incidental rate of $5 per day can be claimed for the incidental expenses, such as for tips or local transportation, even if actual expenses were less than that.

Business trip cancellation fees are also fully deductible. If cancellation occurs in Year 1, but a refund is only received in Year 2, then the cancellation cost can be deducted in Year 1 while the refund is added to income in Year 2.

Business/Vacation Trips

Business trips are deductible if their primary purpose is for business. All costs can be deducted, including transportation to and from the area, lodging, and 50% of meals. If a trip was primarily for business, then indirect costs, such as airfare, must be reduced by the percentage of business days over total days:

Deductible Costs = Indirect Costs × Business Days / Total Days

If the trip was primarily for vacation, then none of those costs are deductible except costs associated directly with business.

Detailed records of business activities during the trip should be kept to substantiate the business purpose in case of an audit. If the business trip is extended for a few days to visit relatives or for sightseeing, then only the business expenses that would have been deductible if the stay was not extended are deductible. If a business trip is extended over Saturday night to receive a discounted airfare, the additional night is deductible since the business purpose was to pay lower fares.

Business Trips Outside the United States

Like CONUS trips, OCONUS trips are deductible for the employee if the primary purpose of the trip was for business and the employee had no control over the assignment of the trip. However, for these rules to apply, the employee cannot be a managing executive of the company or own more than 10% of the company's stock nor can the employee be related to the employer. A managing executive is one who can decide whether the trip should be taken.

Managing executives, self-employed persons, employees related to the employer or who own more than 10% of the company stock can still deduct the costs of a business trip if:

If the 25% rule is not satisfied, travel expenses must be allocated between the business part and the personal part by dividing the number of days spent in the business activity by the number of days spent outside the United States, then multiplying the travel expenses by that fraction. However, if scheduled business activities are several days apart, then those days are counted as business days even if used for pleasure. These are considered business days:

Example: Deducting Expenses for a Trip That Was for Both Business and Vacation

If a business trip includes both domestic and foreign trips, the number of days counted either for business or personal reasons is only for those days outside of the United States.

If travel is by cruise ship, the maximum deduction that can be claimed is limited:

Maximum Deduction for a Cruise Ship

Business Conventions

Most expenses of attending business conventions are not deductible unless the convention directly benefits the taxpayer's business since the conventions are often used as a way to allow associates to vacation in resort areas. This is especially true of investment conventions and seminars or where the purpose of the convention attendance is simply to receive materials to be viewed at the taxpayer's leisure. To be deductible, the business must benefit the taxpayer's business, such as a convention that allows the taxpayer to sell his wares or services to the attendees. The cost of business conventions have been routinely held to be deductible by doctors, lawyers, and other professional groups attending professional seminars. However, foreign conventions held outside of North America must have a reasonable basis for holding the meeting outside of North America for expenses to be deductible.

For instance, a taxpayer attending a convention to sell his wares is obviously advancing his business, so the costs of attending the convention and the other expenses, such as food costs and lodging, are deductible. The entertainment of business associates or clients is also deductible but is limited by the 50% reduction for meal and entertainment expenses. A copy of the convention program and a record of all the sessions and business-related activities should be kept to prove the business purpose of the trip.

There is a limit of $2000 per year for conventions held on cruise ships, but only if all ports of call are in the United States or one of its possessions, and that ship is registered to the United States. The deduction is only permitted however, if a daily schedule of business activities, the number of hours attended, and the total days on the trip are documented and signed both by the taxpayer and by a sponsor of the convention. There is no per diem limit for cruises that qualify for the $2000 deduction.

Travel Expenses of Related Parties

Travel expenses of a spouse or any dependents are not deductible unless they are employees or as co-owners of the business. However, if a spouse is along for social reasons, the taxpayer can deduct all costs that would have been incurred if the taxpayer went alone. The deduction is often higher than 1/2 of the expenses. For instance, if a hotel room cost $300 per night for 2 people and $250 for 1 person, then $250 can be deducted.