Are travel expenses tax deductible? Yes. The problem is that businesses can’t find the deductions. In this article, we’ll touch on Internal Revenue Service (IRS) regulation, the types of travel-related deductions available, and best practices for accounting concerning travel costs.
What’s in it for you? Actionable information that transforms travel into an engine for business growth and tax savings, that’s what.
The steps go as follows:
- Travel to get new business, nurture high-value accounts, or gain industry knowledge.
- Know what is deductible and what’s not. Plan your trip accordingly.
- Get to a net zero tax burden on the travel expenses with tax deductions.
- Stay compliant with IRS regulations.
Let’s start with the stuff you need to know so you don’t get a letter from the IRS.
Yes, the Internal Revenue Service (IRS) promotes business travel, with some caveats.
So, when we talk about IRS regulations, we talk about rules and laws that explicitly and obliquely tell you which travel expenses are tax deductible. Expenses are deemed tax deductible based on the purpose of your trip, the nature of the activity, and applicable tax law.
Here’s what the folks in D.C. say on their website.
“Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job… You can deduct travel expenses paid or incurred in connection with a temporary work assignment away from home.”¹
Let’s break down some of the terms the IRS is using. Stay with me here because details matter.
Expenses must be “ordinary and necessary.”
That’s the phrasing the IRS uses. So, what does it mean?
According to the IRS, an ordinary expense is common and accepted in your industry. A necessary expense is helpful and appropriate for your trade or business.²
What counts as ordinary and necessary? Good question.
Deductible travel expenses fall into eight categories.
Read this section closely.
- Travel by airplane, train, bus, or car between your home and business destination
- Transportation between airports and hotels, as well as hotels and work locations
- Cost of shipping baggage
- Use of your car while at your business destination
- Meals during a work trip
- Dry cleaning or laundry (Tread lightly here)
- Business calls during a trip
- Tips for services related to any of these expenses
Trust your instincts. Don’t deduct non-business travel.
If the trip’s primary purpose is personal, there’s a higher bar for what constitutes a business expense. Does “high bar” mean we’re timid with deductions? Absolutely not. “High bar” means that you should consult a CPA.
So, you’re unsure whether the expense is related to business travel? Keep the receipt and let your CPA make the final call.
Is it possible to stay aggressive on deductions without slipping into gray areas?
Quick detour: I don’t put my clients in “gray areas.” I like saving my clients money of the same dollar amount with meticulous planning and documentation. Yes, there are gray areas, but if you want to run a clean business, stay away from CPAs who use “gray” as a buzzword for “maybe a little bit illegal.”
Now, let’s talk about decision-making on your end: The buck stops with you (and then me). So, trust that little voice in your head. A whisper is enough. Bring the problem to a professional.
How do good people get caught up in fraudulent activity? It’s an interesting question with a myriad of explanations. One thing I know for sure: big lies start with little fibs. If you want to protect yourself and your business partners, squash the rationalizations immediately and seek the advice of a trusted tax professional.
Decide on an accounting method for mileage.
It’s easy to lose money on local, low-dollar travel expenses, but 100 cents is a dollar, folks. Respect your pennies. Make it a mindset.
Here are the two accounting options that protect the pennies but differ in methodology.
What is the standard mileage rate method?
The standard mileage rate is straightforward: Calculate and multiply the total mileage by the standard mileage rate. For 2023, the rate is 65.5 cents per mile.
What is the actual expense method?
The actual expenses method requires you to add up all the money you spend operating your vehicle and multiply it by the percentage of time dedicated to business use.
Maintain a log detailing each trip’s date, purpose, and mileage.
(In the past, I’ve written about the same accounting methods applied to vehicle depreciation and tax savings.)
Get serious about business/pleasure distinctions.
Small business owners wear many hats, and sometimes a business trip comes with recreational activities one would typically associate with a vacation; that’s okay (so long as you don’t include, for example, a receipt for “Bahama Jet Ski Adventures.”)
All joking aside, the takeaway is this: you can deduct expenses incurred from the business-related portion of your travel. But be sure to exclude any of your other costs from the trip.
Meals are 50% deductible.
As I mentioned earlier, you can deduct the cost of meals during business travel. Unfortunately, for 2023, you can only deduct half the cost of such expenses.
Documentation is the proof and the payoff.
Hold on to the documents—all of them.
Keep records of your expenses, including receipts, invoices, and a log of the business purpose for each trip. The more thorough, the better in case of an audit.
Use Schedule C (Form 1040).
All small business owners who want to write off travel expenses for work should use Schedule C (Form 1040), Profit or Loss From Business.
Are travel expenses tax deductible? Yes. So, let’s maximize them.
The truth is my client’s books come with at least 15% of deductible travel expenses that they simply couldn’t see. It’s nothing to be ashamed of, but it’s still a net loss. I’m a Fort Worth-based CPA with over a decade of experience helping businesses like yours reduce their tax liability.
Let’s fix it. Schedule a discovery call today.
Talk soon,
Jeremy A. Johnson, CPA
References
- Topic no. 511, business travel expenses [Internet]. Irs.gov. Available from: https://www.irs.gov/taxtopics/tc511
- About publication 535, business expenses [Internet]. Irs.gov. Available from: https://www.irs.gov/forms-pubs/about-publication-535