Even in the age of the Internet and easy videoconferencing, the need for business travel remains strong. No matter how good your Skype connection or how robust your conference call capabilities, some things are just better done in person.
When the need for business travel arises, it is important to understand all the implications, from the out-of-pocket costs and time away from the office to the tax consequences. In regard to taxes, at least, there is some good news.
When you travel for business, the actual costs of that travel, including airfare, cab rides to and from the airport, rental cars and hotel rooms, are deductible. The deductibility of these common business expenses apply to all out-of-town business trips, and you can also deduct the cost of meals.
Importantly, meals are deductible even if they are not connected to your business or to any business function. Just as importantly, only 50% of the cost of the meal is deductible, so choose your entrée with care. The news is a bit better if you are a long-haul trucker; in that case, you can deduct 80% of your meal.
This more generous compensation for business meals also applies to certain employees of bus lines, train companies and airlines, as well as some merchant mariners.
The IRS does recognize that the deductibility of meals can create room for fraud and exaggeration, so the agency does not allow a deduction for meals and lodging expenses considered "lavish or extravagant". That term has been held to mean "unreasonable", so you might want to hold back on the $200 filet mignon or the $1,000 bottle of wine.
Expenses for personal entertainment during your business trip are not tax deductible, but expenses incurred while entertaining clients can be deducted from your business income. You can also take a deduction for things like dry cleaning services, telephone calls and the use of computers, which are all considered legitimate business expenses.
Special care must be taken when combining business and pleasure, and separating expenses carefully is always recommended. If you fly to a far-of location for five days of business meetings and decide to stay for the weekend, you can only deduct your meals, lodging and other expenses for your business-related time. Your two-day vacation is totally at your expense.
The good news is that the cost of the travel itself, including the airfare and the cab to the airport, is tax deductible, even if you do take on a day or two of vacation time. As long as the primary reason for the travel was business related, you can deduct the cost of the trip. But if the trip was primarily personal, with a few business meetings tacked on, you cannot deduct the cost of your airfare and related travel expenses.
Sometimes your trip will not involve the actual conduct of business, but the costs could still be tax deductible. If you are traveling to attend a convention, seminar or other business-related event, the IRS will first check the nature of the meetings to ensure they pass muster. If the meetings are deemed to be business-related, the deduction will be allowed. If the IRS finds that the business travel was just a vacation in disguise, expect to write a check for the disallowed deduction.
As with any business-related expenses, be sure to keep your receipts and track your costs carefully. You will need to back up your business tax deductions if the IRS questions your return, and the more information you have, the better off you will be.
If your spouse accompanies you on your business trip, you will need to be careful when claiming any deduction. The rules governing spousal travel and expense deductibility are quite restrictive, and you will not be able to deduct any expenses unless your spouse is an employee of the company and the travel is also for business expenses.
Last but not least, it is important to note that you cannot deduct incidental personal expenses you incur as a result of your business trip. Things like pet expenses, small purchases and the like are not deductible, and including those personal items could get your return flagged for an audit.
Travel is an integral part of the business world, but the deductibility of travel-related expenses can make it a bit more bearable. Knowing the rules before you go, and abiding by them once you return, is the best way to keep your tax bill low without attracting unwanted attention from the tax man.
Our CPAs specialize in finding additional small business tax deductions. Reach out to one of our business tax specialists to determine if you may be missing travel deductions in your business.