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 using 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.
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, then 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, then 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 are only deductible if the taxpayer is on a business trip that lasts 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.
Instead of keeping records for meal costs, 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 federal per diem rate can also be claimed for lodging.
The standard meal allowance for travel within the CONterminous (or CONtinental) United States (CONUS), meaning locations within the continental United States, is $46 per day, although higher rates may apply to more expensive localities such as major metropolitan areas and resort areas. Outside of the CONterminous United States (OCONUS) rates apply for travel to Alaska, Hawaii, Puerto Rico, United States possessions, and foreign countries. Generally, only 75% of the allowance can be claimed for the 1st and last days of the trip. Workers in the transportation industry who are subject to the Department of Transportation hours of service limits, such as interstate truck drivers and pilots, can deduct 80% of their meal costs. CONUS rates can be found by zip code or by city and state at https://www.gsa.gov/portal/category/21287.
If meals are not claimed on a particular day but the taxpayer had other incidental costs, then instead of using actual costs, an allowance of $5 per day can be claimed for the incidental expenses, even if the actual expenses were less than that.
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 of business is far away 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, then 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, then the taxpayer's tax home is wherever the worker happens to be during that time.
If the taxpayer works in more than one location regularly, then the tax home is considered the location of the principal business. The principal place of business is determined by the following factors:
- the taxpayer's permanent residence;
- amount of time actually spent working in each area;
- the amount of income earned from each area;
- the duration of the businesses at the multiple locations, and
- the amount of business activity in each area.
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.
Travel and living costs can be deducted if the taxpayer is on a temporary assignment 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 location becomes the taxpayer's tax home, even if the actual duration of the assignment turns out to be less 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 work area, thus allowing expenses to be deducted. However, the remaining amount of 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.
Business Vacation Trips within the United States
Business trips to resort areas can be deductible if the primary purpose of the trip is for business. All costs can be deducted, including transportation to and from the area, lodging, and 50% of meals. However, if the main purpose of the trip was for the vacation, then none of those costs are deductible, except for costs associated directly with business. The taxpayer should keep a detailed record of business activities during the trip to substantiate the business purpose of the trip in case of an audit. If the business trip is extended for a couple of days to visit relatives or for sightseeing then only the business expenses that would have been deductible had the taxpayer not extended the stay are deductible. If a business trip is extended over Saturday night to receive a discounted airfare, then the additional night is deductible, since the business purpose was to take advantage of 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 make the decision on 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:
- the total time outside of the United States was 1 week or less, not counting the day of departure but counting the day of the return;
- if the trip lasted longer than 1 week, then the trip can still be deductible if:
- less than 25% of the taxpayer's time was spent on vacation or other personal activities; or
- the planning of the trip was organized to conduct business rather than to take a vacation.
If the 25% rule is not satisfied, then the taxpayer must allocate travel expenses 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 the taxpayer uses them for vacationing. The following are considered business days:
- Business days: Days mainly devoted to business.
- Required presence: if the taxpayer is required to be there, even for a short time, then it counts as a business day.
- Business travel: Days traveling to another business location, but only the number of days that would be required to travel to the destination directly.
- Weekends and holidays that are between business days, not including the return-to-home day. So if you spend Friday and Monday on business, but spend Saturday and Sunday sightseeing, then that counts as 4 business days. But if you spend Monday sightseeing, then work on Tuesday, then, if Monday was not a holiday, that would only count as 2 business days.
Example: A United States taxpayer purchased a round-trip ticket between New York and London to attend a business meeting on Monday and on Friday, then traveled to Rome on Saturday for a 10 day vacation, then returned to London and flew home to New York. The 3 intervening days between the business meetings on Monday and Friday count as business days, which yields a total of 5 business days. The entire trip took 15 days, therefore only 1/3 of the round-trip airfare will be deductible, and none of the expenses of traveling to Rome and back will be deductible.
If a business trip consists of both domestic trips and foreign trips, then 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, then the maximum deduction that can be claimed is limited:
Maximum Deduction for a Cruise Ship = Number of Days on the Cruise Ship × Highest Federal per Diem Rate for Travel in the United States × 2.
Generally, the expenses of attending business conventions are not deductible, unless the convention directly benefits the taxpayer's business, since the conventions are often a means of allowing 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, if the taxpayer attends a convention to sell his wares, then that 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 taxpayer should keep a copy of the convention program and a record of all the sessions and business-related activities 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 limitation for cruises that qualify for the $2000 deduction.
Travel Expenses of Related Parties
The travel expenses of a spouse or any dependents are not deductible unless they are active in the business, either as employees or as co-owners. However, if a spouse is along for social reasons, then the taxpayer can deduct all the costs that would have been incurred if the taxpayer went alone. The deduction will often be considerably more than ½ of the expenses. For instance, if a hotel room cost $300 per night for 2 people and $250 per night for 1 person, then the taxpayer can deduct $250 that would have been incurred had she gone alone.