As you grow your business, you'll often have to travel out of town for work purposes. But, we frequently get asked, "What travel expenses are deductible?" The IRS has some strict rules about this so let's go over what you can and can't write off at tax time.
Deductions when you travel out of town for business
If your trip is for business, almost are of your business travel expenses are deductible. Let's separate these into two broad categories: Business expenses at your destination and transportation costs.
Business travel expenses
There are a variety of expenses you incur when you travel for business. These are all deductible. The list below includes the following but isn't limited to:
- Hotels or lodging
- Transportation at destination (taxi, Uber, public transportation)
- Computer rental fees
- Tips you pay on any of the other costs
You're human, so you have to eat and drink. The IRS recognizes this but has also seen people try to abuse the meal deduction in the past. Also, your meals at home aren't deductible. Because of that, you can deduct 50 percent of your meals and beverages on business trips. Often, your meals during business trips can be with other people. It's common to lay the groundwork for a deal or to get a deal over the line while out eating. These food costs can also be deducted at 50 percent. Remember, you must discuss business with one or more business associates either before, during or after this entertainment expense. The days of the three-martini "business" lunch are over. These entertainment expenses must include actual business discussions. These don't have to lead to direct deals, though. It's not just for clients or potential clients, too. You can deduct half the costs of a business meal with suppliers, employees, agents, partners or anyone you're likely to meet for business reasons.
Business travel and transportation expenses
If you spend more than half your time on business activities while on a trip, you can deduct 100 percent of your transportation costs. That could be the cost of flights or train tickets. Like with other business expenses, you can only deduct travel expenses that are "ordinary and necessary business-related expenses." It also says that extravagant expenses aren't allowed to be deducted. There's a bit of subjectivity in those words. You can deduct the costs of first-class tickets but know this will likely raise red flags with the IRS. Be prepared to justify the business reasons for this type of airfare. One justification could be that this was the only flight you could get to a particular location by a specific time. Of course, don't forget about deducting your mileage when you're out of town for business.
Mixing business with pleasure
If you plan it properly, you may be able to combine some personal fun with your business trip and still receive some tax relief. The key is that business-related actions consume more than half of your time. Example: Jill, a consultant from Phoenix, travels to Chicago for five days to work with a new client. She decides to take the weekend to go sightseeing. She takes in a Cubs game, goes on an architecture tour and catches up with some old friends at Restaurant Row. Because more than half her time is spent on work, she can write off the cost of her flights. She can also deduct the portion of lodging related to work and 50 percent of the costs of the meals related to her consulting job. She cannot deduct the costs of accommodation for the weekend or her personal entertainment.
Business trips out of the country
The above rules apply if you travel within the United State, but there are some slightly different rules for foreign trips. If you travel outside the United States for no more than seven consecutive days, you can deduct 100 percent of your transportation expenses if you spend part of the time on business. It doesn't have to be a majority of the time, just some of your time. You can also deduct the business expenses on those days you do work. The IRS isn’t trying to subsidize your vacation to the Amalfi Coast, though. Once you hit that week threshold, the requirements for work go up. If you spend more than 75 percent of your time on business at the foreign destination, you can deduct your airfare (or other transportation) and other business-related expenses including lodging. If you spend more than half your time but less than 75 percent of your time on work, you can only deduct the business percentage of your costs. This includes transportation, lodging and others costs you incur. If you spend less than 51 percent of your time on work while on a foreign trip that lasts for more than seven consecutive days, you cannot deduct any of your costs.
