Business Related Travel: What is DeductibleSep 25, 2019
So you want to attend a conference or a training out of town and you need to know how much you can deduct as a business expense. This blog post covers guidance listed in IRS Publication 463 Travel, Gift and Car Expenses.
The IRS defines travel expenses much the same as other business expenses, as ordinary and necessary for your business. This does not mean you were required to incur the expense. It means the expense is common and accepted in your type of business and that the expense is helpful and appropriate for your business.
Travel expenses are those that require you to be away from your tax home (usually the general area you operate your business) for substantially longer than an ordinary day of work and you need to sleep or rest during your trip. Special rules apply if you have a temporary work location away from your previous tax home. If the location of your tax home is not clear, see IRS Publication 463 or for additional guidance.
If you are certain you are traveling away from your main business location and tax home, the guidance below will explain what you can deduct for business.
You can deduct the cost of transportation by air, bus, car, taxi or uber, baggage and shipping costs, mileage, hotel, meals, dry cleaning or laundry while away, phone, wifi and other reasonable and business related expenses. This includes mileage to and from the airport for a business trip. See more about mileage deductions here: car blog.
If you have a mix of business and personal expenses on one bill, you need to separate them out. For example, if your hotel bill covers some business related days and some personal days, only deduct the business related portion of your stay. If you rented a movie in your hotel room, separate out the movie expense and do not deduct it.
NEW TAX LAW UPDATE: For 2021 and 2022 you can deduct 100% of meals ordered from or consumed in a restaurant. This is to encourage businesses to support the restaurant industry as we emerge from the pandemic. In other years, all travel meals are 50% deductible.
Usually you can deduct reasonable meal expenses, even expensive meals as long as they are not lavish or extravagant. Lavish and extravagant is not defined so you will want to be prepared to explain why a meal was reasonable and not lavish.
As an alternative to deducting actual meal expenses, you can pay yourself or your employees per diem rate. A per diem is a daily amount based on the location of your travel which covers meals and incidental expenses (M&IE). Self-employed owners are only allowed to use per diem rates for their meal costs. You would take the per diem in lieu of actual meal expenses. The M&IE per diem rates for the 48 contiguous states are published by the GSA. To find per diem rates for the US city you are traveling to, use the GSA Per Diem Lookup. Enter location or zip code and the dates of travel. On the search results page, you scroll down to the section that says "Meals & Incidentals (M&IE) Breakdown" and see the per diem rate for meals and incidental expenses per day as well as the day of travel. The per diem for a travel day is 75% of the full day rate.
Note: The GSA only lists per diem rates for the 48 continuous states. For Alaska, Hawaii and US territories use the the most recently dated Civilian Per Diem Bulletin and search for the location to which you are traveling. For foreign travel, use the Office of Allowance Foreign Per Diem Rates by Location lookup. Be sure to use the M&IE rate.
You can deduct the cost of attending conferences or conventions if you can show it benefits your business. However, if the event is outside of North America, additional rules apply. You must show:
- The meeting outside North America is directly related to the active conduct of your business and...
- It is just as reasonable to attend the meeting, conference or convention outside North America as it would be to have it within North America.
To determine reasonableness of attending a meeting outside of North America, consider the business purpose, activities taking place, purpose and activities of sponsoring organizations, homes of active members of sponsoring organizations and other locations which meetings have been held and other relevant factors. You want to make sure the destination, format and activities do not make the trip more into a vacation than a business trip.
The North American area includes: American Samoa, Antigua and Barbuda, Aruba, Bahamas, Baker Island, Barbados, Bermuda, Canada, Costa Rica, Curaçao, Dominica, Dominican Republic, Grenada, Guam, Guyana, Honduras, Howland Island, Jamaica, Jarvis Island, Johnston Island, Kingman Reef, Marshall Islands, Mexico, Micronesia, Midway Islands, Northern Mariana Islands, Palau, Palmyra Atoll, Panama, Puerto Rico, Saint Lucia, Trinidad and Tobago, USA, U.S. Virgin Islands, Wake Island.
Cruise ships: You can deduct up to $2,000 per year of conferences, conventions, seminars or meetings held on a cruise ship if it is related to the active conduct of your business, the vessel is registered in the US, all ports of call are in the US or in the possession of the US, and you attach to your tax return a statement from you and one from the sponsoring organization specific information about the trip. See more info on page 9 and 10 here for luxury water travel and cruises specifically: https://www.irs.gov/pub/irs-pdf/p463.pdf.
Combining personal travel with business
When combining business and personal travel, the trip needs to be primarily for business. Although the Internal Revenue Code does not define "primarily for business" you can use the analogy if it quacks like a duck, it might be a duck. For example, if you take a seven day trip and bring your family and then spend one afternoon in a local business seminar, that looks like a vacation not a business trip. A good rule is to ensure there are more days dedicated to in-person business activities than are considered personal days. Attending a 4 day conference, plus one business travel day to get there and one travel day home, and taking 3 additional days for personal works fine.
The Internal Revenue Code states:
"(2) Whether a trip is related primarily to the taxpayer's trade or business or is primarily personal in nature depends on the facts and circumstances in each case. The amount of time during the period of the trip which is spent on personal activity compared to the amount of time spent on activities directly relating to the taxpayer's trade or business is an important factor in determining whether the trip is primarily personal. If, for example, a taxpayer spends one week while at a destination on activities which are directly related to his trade or business and subsequently spends an additional five weeks for vacation or other personal activities, the trip will be considered primarily personal in nature in the absence of a clear showing to the contrary." https://www.law.cornell.edu/cfr/text/26/1.162-2
For the deductions, split the business and personal costs. You can deduct all the costs you would have incurred if you had only traveled for business: airfare, car rental, hotel on the days of the conference including arriving the day before and leaving the day after. But if you bring your family and they need an extra room or there is an extra cost for them to stay in the room, you cannot deduct their costs. And you cannot deduct any costs for hotel, meals or touring for yourself or family on the personal days.
The travel needs to be essential to the work. This means it is required that you be physically in that location. It is not permitted to deduct travel costs solely for change of scenery or because you want to work remotely in a different location away from home. However, you can deduct travel costs to scout out locations for an upcoming event or to write about being in that location. If you are not attending an in-person event, keep records of your business activities, such as dates of appointments, who you met with, purpose for each activity, to be able to show the primary activities during the trip where for business and not personal.
If your trip spans a weekend, for example you attend a two-week conference that is Monday-Friday one week and Monday-Wednesday the second week, you do not have to count the weekend as personal time. It would be required for you to stay over to attend the second week, so the entire period can be considered business days. If however, you decide to stay through the second weekend, you can count one business travel day home and the other extra days are personal, and costs for the personal days would not be deducted.
The personal days do not have to occur in the same city. You can attend a conference at one out of town location, and then on your way home stop for a personal side trip. You would need to carefully allocate the costs between business and personal costs for the trip home, so you end up deducting what the trip home would have cost excluding the cost for the personal side trip.
Traveling with others
You can deduct travel related expenses for you and your employees if you and they are traveling for a legitimate business purpose. You can take along a spouse or friend who is not attending for a business purpose, but you cannot deduct their expenses.
For example, you will deduct your airfare costs but not your companions airfare. If you stay in one hotel room that you would have had to rent anyway for yourself, you can deduct the cost of the room. If you rent an additional room for your companion, you can only deduct the cost of your room. If you share an Uber from the airport to the hotel, you would have incurred that cost anyway and can deduct the cost of the Uber.
If the person attending with you is your employee, you can deduct their travel costs if they have a business reason to attend. They cannot only perform minor or incidental tasks. For example, if you attend a conference and you also pay for adult child who is your employee to attend because they will benefit from the conference material which relates to work they perform for you, you can deduct their travel costs. If you bring your family including your 8 year old child who you employ for minor administrative tasks, and in the evening the child sorts your notes into folders, that is incidental activity and you cannot deduct their travel expenses.
If your trip was entirely for travel you can deduct all of the business expenses related to the trip. However, the location of your trip can impact the deductions.
Within the US
The trip needs to be primarily for business to be deductible. If you added on a few days for personal travel, you can only deduct the business portion of your trip. For example, if you attend a 4-day conference and stay an extra two days for personal reasons, you can deduct your airfare or mileage to and from the the conference, plus meals or per diem and car expenses on the conference days only. The hotel, meal and other expenses incurred on the personal days are not deductible.
If more than half of your trip was for personal reasons, you cannot deduct the travel costs of your trip. You can deduct business expenses you had while on the trip. For example, if you go on a 6 day trip and while there you spend one day doing paperwork, sending emails, making phone calls and you send a fax, you can deduct the wifi, phone and fax costs associated with your business activities. But you cannot deduct any part of the airfare, hotel, meals or a per diem rate.
Outside the US
If your travel is outside the US there are several ways to be able to deduct the cost of the trip. However, if you have days that were not for business, you generally must separate out business and personal expenses. You only deduct expenses such as hotel, meals and related expenses for business related travel days.
- If your entire trip is for a business purpose, you can deduct all the business costs associated with the trip.
- If you did not have substantial control over the trip because you are an employee who was reimbursed or paid an allowance for the trip, you are not related to your employer and you aren't an owner or managing director, you can deduct the cost of the trip.
- If you spend a week or less (so 7 or fewer days) outside the US, you can deduct the cost of the trip, less the hotel and personal expenses for any personal travel days. To calculate whether you were outside of the US for 7 days or less, do not count the day you leave the US but do count the day you return to the US.
- If you are outside of the US more than a week, but less than 25% of your time was spent on non-business activities, you can deduct the cost of the trip. Your travel days and business days count as deductible days of your trip.
- If you can establish a personal vacation was not a major consideration for your travel outside the US, you can deduct your travel and expenses for the business days and travel days.
Special rules apply if a portion of your trip is inside and a portion is outside the US. See IRS Publication 463 for additional guidance.
If your trip outside of the US was primarily for personal reasons, you cannot deduct the costs of the trip but you can deduct specific costs related to work done while on the trip.
If you have business related travel on a cruise, there is a limit on the amount you can deduct equal to twice the highest federal per diem rate. Rates are updated by year so consult the latest publication rates.
You will generally be able to deduct travel expenses outside your tax home area if the primary purpose of the trip is for business. You will not usually be allowed to deduct personal expenses incurred during a business trip. It is always a good idea to consult a tax professional prior to taking a business trip to ensure you plan and arrange your trip to be able to take the maximum deductions.
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