Business and Personal Travel and What Is Deductible

According to the IRS, business travel is travel away from your tax home that is “substantially longer than an ordinary day’s work” and that requires you to sleep or rest while away from home. The travel must also be temporary which is defined as lasting less than a year.

Primary Purpose Test

For travel in the United States, you need to pass the primary purpose test. The easy way to do this is to make most of your days business days. You need to have a reason why you expect the trip will make money for your business, whether immediately or sometime in the future.

But if there is some "incidental" personal time, that's okay. For example, if you are traveling to Dallas for business and you spend an evening with family in the area, that's "incidental" to the main purpose of the trip. The IRS says,

"The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip."

What Are Deductible Travel Expenses?

A travel expense is the expense of getting to and from the business destination and an expense of sustaining life while at the business destination. Here is a list of common travel expenses:

Costs of traveling by airplane, train, bus, or car between your home and your overnight business destination
Cost of renting a car or taking a taxi, commuter bus, or airport limo from the airport to the hotel and to work destinations, including restaurants for meals.
Costs for baggage and shipping of business items needed at your travel destination.
Costs for lodging and meals including tips to waiters and waitresses.
Costs for dry cleaning and laundry
Costs for telephone, computer, internet, fax and other communication devices needed for business
Tips to bellmen, maids, skycaps, and others.

Rules for Calculating Business Deduction:

Business travel deductions while away from home can be calculated using either the actual costs (which will require receipts) or using a travel per diem method.

The term "per diem" means per day. Per diems are amounts that are considered reasonable for daily expenses while traveling, for meals and miscellaneous expenses. Per diem rates are set for U.S. and overseas travel, and rates differ depending on the area.

For example, per diem rates in larger U.S. cities are higher than for sections of the country outside larger metropolitan areas. Companies can set their own per diem rates, but most businesses use the per diem rates set by the U.S. government.

Per diem reimbursements are not taxable if they are greater If your employees receive more per diem than the maximum rate set by the General Services Administration, the excess is taxable to the employee.

Who Is Not Eligible To Use Per Diems

Sole proprietor/self-employed persons are limited to claiming the per diem rate for mileage and meals & incidental expenses only. Sole Proprietors/self-employed persons cannot use the per diem rate to deduct your lodging expenses although they can still deduct the actual expenses.

Special Business Travel Situations

You may be able to deduct business travel costs on a combined business/personal trip

If you are traveling within the U.S., your trip must be "entirely" business for you to take deductions for business travel costs. But if there is some "incidental" personal time, that's okay. For example, if you are traveling to Dallas for business and you spend an evening with family in the area, that's "incidental" to the main purpose of the trip. The IRS says,

You may not be able to deduct the cost of bringing a spouse on a business trip

The cost of bringing a spouse, child, or other person along on a business trip is considered a personal expense and is not deductible. But if you can prove that the other person is employed by the business and is performing substantial business-related tasks while on the trip (taking minutes at meetings or meeting with business clients) you may be able to deduct the cost of this person's travel.

Conclusion

The rules governing business travel are full of exceptions and limitations. To be certain you use the method that’s right for you, please discuss with us. We can review your situation and your options with you.