Are travel expenses tax deductible? If you are self employed or run your own business, they most certainly are.
What Travel Expenses are Deductible?
- Airline Tickets
- Uber Fare
- Baggage Fees
- Mileage on a Personal Vehicle
- Meals and Entertainment
According to the IRS, your trip and its varying expenses can be 100 percent tax deductible if it meets four considerations: (1) You need to leave your tax home—that is, where your taxable business is located—for a period longer than a normal workday, for the purpose of doing business somewhere else, (2) the majority of your time needs to be spent in pursuit of business activity, (3) the expenses must be ordinary and necessary, and (4) the trip must be planned in advance.
Let’s take a deeper look at all four considerations to qualify travel as tax deductible.
You must leave your tax home for a period longer than a normal workday: Leaving your tax home for more than a business day excludes any travel you might do locally. However, you should also be tracking that mileage to use as a tax deduction, along with money you spend on gas, and any repairs needed for keeping the vehicle you use for work in good service (speak to your accountant for write off instructions regarding these points because commuting to and from a workplace in and of itself is not tax deductible). You also must have the intention of conducting some business-related activity in the location you are traveling to, such as meeting a client, attending a conference, picking up inventory, or examining a part of your supply chain.
The majority of your time needs to be spent conducting business: This is measured in days. That means if you meet a client in the morning, that day can count towards business, even if you spend the rest of the afternoon at the pool. Days spent traveling to and from your destination are counted as business days—so if you fly to the Bahamas to meet a few clients, the day you fly there and the day you fly back could add two days to your business tally.
The majority of your time must be spent conducting business: Remember, though, that’s measured in days, not hours or minutes. So, for example, if you spend three days meeting clients, one day fishing, and one day sunbathing on the beach, that could work as a business trip (you cannot write off your fishing boat rental unless you bring a client along as part of a work meeting). However, if you spend two days meeting clients, and three days purely vacationing, that might not work. And yet, if you spend an additional two days traveling (there and back) you would suddenly have four days dedicated to business and three days dedicated to personal use, which puts your entire trip back into the business trip category.
The expenses must be ordinary and necessary: That is an important consideration to keep in mind if the IRS decides to audit your taxes. An economy rental car is sufficient for getting from the airport to your hotel, but a BMW or Jaguar is probably not (though you might be able to build a case for a more expensive rental car if you need to entertain high profile clients or create a favorable impression). As you can imagine, this area can become somewhat gray, so you will have to use your personal discretion to decide what falls into the realm of ordinary and necessary. You can, however, spend whatever you choose in terms of personal expenses. See a rare piece of art that you’d love to add to your living room? Go ahead and buy it—just don’t include it in your write off of business travel expenses.
The trip must be planned in advance: This prevents someone from taking a personal vacation, handing out a few business cards to random people they meet, and calling it a business trip. Even if you meet a new client on the trip and talk about business, you won’t meet the requirement for a business trip to be planned in advance—but perhaps you could arrange to meet that client back in Aruba next month.
Note that these rules apply to domestic travel. If you travel outside the United States for business, you only need to spend 25 percent of your time on business, again measured in days. If you spend less than that, whatever percentage of time you spend on business (again, measured in days) is the percentage of your trip you can deduct.
So, for example, if you went to Africa on an eight-day business trip, and only one day was spent meeting clients, you might be able to get away with writing that off as a trip for business purposes. Remember, two days traveling can be counted for business, and one day conducting business are three days—which is more than 25 percent of your trip (measured in days). But if your trip was 10 days, you would only be able to deduct 30 percent of your eligible expenses in terms of an itemized deduction.
Most people do not need to travel for work, but some do. Sales professionals might travel to meet new clients. A retailer might travel to browse goods at a factory. A real estate investor might travel to check on properties. It’s important to note that travel purposes that aren’t quite for pleasure or business do not necessarily fall into the business category. For example, a patient going to a doctor or surgeon for a consultation might afford some medical expenses that can be written off, but it’s not a business trip. If, however, a doctor was traveling to visit a patient, they could count that as a trip for business. In any case, even if you don’t usually need to travel for work, if you are attending a conference, meeting, or workshop that relates to your personal or professional development, that could be something you write off, even if you are not self-employed. Know of any conferences going on in or near a place you’ve always wanted to visit—book it!
Looking to expand your business knowledge in a hands-on way? Consider signing up for one of Anderson Advisor’s many business workshops and events.
What is a Travel Tax Credit?
You might be wondering if personal travel expenses are deductible. They are not, for now. There has been much talk about a travel tax credit—proposed in particular by Arizona Senator Martha McSally—that would allow American taxpayers to enjoy a tax credit of up to $4k per person ($8k for a married couple filing jointly) with an additional tax credit of $500 for each child 16 and under, for any domestic travel.
The idea behind this proposal is to stimulate local economies hard hit by COVID shutdowns. Bars, restaurants, hotels, airlines, cruise lines making domestic stops, and other travel industry related businesses would also see a benefit from a Travel Tax Credit, but as of now (at the time of this article) such a proposal has not been passed into the tax code. In the meantime, it is perfectly legal to incorporate some personal vacation time into a business trip, as long as that trip meets all the requirements outlined above.
After reading the above information about McSally’s proposal for a tax credit that to benefit the tourism industry and make an upcoming vacation more appealing, you might be wondering when the Travel Tax Credit will pass into law. Until it does, there are plenty of other tax incentive plans and credits you can take advantage of. For instance, the CARES Act (in addition to facilitating such measures as the stimulus check deposits) offers many tax relief options. You can learn more about them by browsing through in the latest IRS publication or consulting a tax professional. But even generally speaking outside of pandemic-related tax legislation, tax considerations, like the earned income credit or the standard deduction, are a great way to score a great tax break and possibly even get a refund, without the need to travel.
What Travel Expenses are Deductible?
There are many business travel expenses that are tax deductible. These expenses include:
Airline tickets are 100 percent tax deductible, unless you are traveling internationally and spend less than 25 percent of your time on business. Remember that business travel expenses must be ordinary and necessary. In most cases, a business class ticket is convincingly ordinary and necessary. A first-class ticket may not be—you will have to use your personal discretion in regards to your airline travel arrangements.
Generally speaking, a meal expense is a different category in terms of eligible expenses, and one that usually only allows you to write off 50 percent of the meal (this is different in 2020 and 2021—more on that later). But if the meal expense on your flight is built into the ticket price, then enjoy the pate-de-foie-gras and complimentary champagne you are served on your flight (and enjoy the tax break as well).
Uber fare, Lyft fare, taxi fare, or any other similar costs of ground transportation are also tax deductible. Remember that the travel expenses you write off for business purposes must be ordinary and necessary, so a nighttime Uber to a local casino should probably be paid for with a different credit card. Otherwise, if you want to be scrupulous about your accounting, you’ll have to parse out which Uber fees were for getting to a business meeting, and which ones were for personal enjoyment.
Incidentally, this example illustrates why it is best practice to always carry a separate credit card for each and every incidental expense relating to your business, because at the end of any accounting period or the end of the tax year, when you file your tax return, it will be easy to add up your business expenses. All you’ll have to do is take a look at the bank statement or credit card statement for the account exclusively used for business purposes.
Baggage fees are also deductible. Thankfully most airlines have the baggage fees built into the cost of a ticket, but occasionally you incur a separate baggage fee. This usually happens on the way home, when travelers have crammed extra souvenirs into their suitcase or have an oddly-shaped package to bring home.
A bag mixed with possessions you needed for the trip and odds-and-ends you picked up along the way, for personal enjoyment, would seem to be a reasonable write-off. A large oddly-shaped package just for your personal use (for example, a piece of art) would not be. Use your discretion, or better yet, speak to your accountant or tax professional.
Traveling with a pet? The kennel fee for a dog or cat would is generally classified as a personal expense that isn’t eligible as an itemized deduction. However, if said pet is a supportive guide dog or therapeutic animal that always accompanies you, that would be a different story.
Mileage on a Personal Vehicle
If you are driving to a work-related destination in a personal vehicle, your mileage is tax deductible, as is gas and any surprise repairs along the way. If you are using the vehicle you would typically use for work, you can put whatever you’d like in the vehicle for the ride (family members, pets, etc). However, if you use a different vehicle to accommodate personal travel considerations (such as driving a truck in order to pull a trailer with a motorboat on it) that would stray into the category of non tax deductible expenses.
Other associated vehicle expenses can also be part of your write-off, provided they are an ordinary and necessary part of your travel experience. For instance, if you need a spare tire on your road trip across the country to meet with clients in different states, it’s likely that this is a perfectly legitimate example of the many vehicle expenses you can write off in regards to travel. Speak with your tax professional to understand the range and scope of what you can and cannot write off as it relates to upkeep of a vehicle you use for work.
Lodging expenses are tax deductible. It’s a good idea to schedule work days between personal pleasure days or vice versa so that your lodging remains necessary until the end of your trip. This will also allow you to deduct the entirety of your lodging expenses as a tax write off.
It is up to your discretion what kind of accommodations you reserve for yourself. Just remember that if the IRS decides to audit your taxes, you may have a hard time convincing them that a 10-bedroom beachfront bungalow was an ordinary and necessary expense when a hotel room would have sufficed. However, you can bring your entire extended family to enjoy the bungalow and write off whatever portion would have been sufficient for you alone.
Note that the same issue does not usually apply to a hotel room with multiple beds because it’s likely such accommodations would have been needed for your own usage anyway. This means you could book a hotel room for business, bring your family, and write off the whole bill.
Meals and Entertainment
Meals and entertainment that facilitate your business are partially deductible. You can generally deduct 50 percent of the cost from your taxable income According to the TCJA (Tax Cuts and Jobs Act), these meals must not be lavish or extravagant, and the food must be served to the business traveler or a business associate. You cannot deduct food consumed by your dependents (such as a wife and children) unless they are in attendance at the meal for bona fide business purposes.
Note, however, that for 2021 and 2022, business meals in restaurants are 100 percent tax deductible. This is obviously in large part meant to stimulate the restaurant economy, but it certainly makes traveling for work more enjoyable. Additionally, any food consumed en route to your trip can be written off, even if it is consumed with great enjoyment. Driving along the coast of Maine to tour a supplier’s factory? Feel free to stop for some lobster bisque. Alternatively, you can write off your meals using a table provided by the IRS for the standard meal allowance, which is the amount that federal workers can charge for meals while traveling for work. These per diem rates are found in IRS Publication 1542 or on the IRS website. However, because you can write off 100 percent of your meal expenses in 2020 and 2021 (for business related meals), it’s better to use that method.
Can You Claim a Tax Credit for a Vacation?
You cannot claim a tax credit for a personal vacation, unless Congress passes the Travel Tax Credit and the president ratifies the bill. Until then, the only way to claim a tax credit for a vacation is to build the vacation into your business trip.
Gig workers who conduct business from a laptop might think they have a way around this, but they don’t really need to work in Waikiki or Phuket, so they won’t be able to write off travel expenses unless they are actually meeting a client in person, attending a seminar, or a tradeshow. On the other hand, an independent contractor, such as a truck driver who is traveling all the time, might be able to enjoy the benefits of travel related tax deductions all year round.
How Do I Claim a Travel Tax Credit?
As mentioned, the Travel Tax Credit as a tax break proposal meant to stimulate the tourism industry has not yet been passed into law, so there is no existing form to claim that tax credit. But for all those business travel expenses you accrue on business trips over the year—airfare, lodging, meals, incidental expenses—you just need to write them down on your Form 1040 Schedule C, where you list your gross income, deduct your expenses, and arrive at your adjusted gross income for tax purposes.
It’s a best practice to compile your travel expenses (and all business expenses, for that matter) into a readable accounting format, like a spreadsheet. You don’t necessarily need to send this with your tax return to the IRS, but it’s good to have just in case you are ever audited. Working with a tax professional comes in handy here as well, since they can consult on how to create a list of each and every expense that you paid for out of pocket over the course of the tax year. That said, there is no particular special form you need to fill out to claim the tax break offered by business travel. You just need to keep track of the expenses and then list them with all other itemized deductions on Form 1040 Schedule C.
Track Business Travel Expenses to Reduce Your Tax Burden
A tax credit is a wonderful way to reduce your tax burden by taking business related expenses away from your income. For self-employed individuals or business owners who occasionally need to travel as part of their business, these travel related tax credits are a great way to make their tax bill a fair reflection of their net income, after expenses. It just so happens that if done the right way, you can mix a little pleasure into your business travel. And for taxpayers whose income is exclusively tracked on a W2 from an employer, there is hope that the Travel Tax Credit will pass, stimulating the travel economy and making that bucket list road trip one stop closer to reality.
It’s important to keep in mind that the write offs afforded by travel expenses are only meant to defray the costs of these trips as a legitimate component of running a business. Remember that there are four requirements (according to the IRS) for a trip to qualify as a business trip, and that one of them includes the trip actually serving a business purpose. Additionally, the trip must be planned in advance, it needs to be more than a working day away from your tax home, and the majority of your time (measured in days) must be involved in business activity, unless you are traveling internationally (and then it’s just 25 percent). If your traveling meets all these criteria, then you can certainly enjoy writing off your trip as a business expenses among other itemized deductions.
Looking for more business tax credits? Join our next Tax Tuesday Webinar! Every week, Toby Mathis covers the tax issues business owners care about most.
Free Strategy Session with an Anderson Advisor
Receive a detailed risk assessment to assist in lowering problem areas that could wipe out all of your assets with one wrong move. Speak with an Anderson Professional Advisor to get your FREE Strategy Session. Limited-Time offer: FREE (a $750 value.)