When Congress passed the Tax Cuts and Jobs Act (TCJA) in late 2017, the deductibility of various popular business expenses seemed to be threatened. Specifically, clarification was needed to determine exactly what could be deducted with regard to deductions for business meals. In issuing Notice 2018-76 last fall, the IRS preserved business deductions for the separate costs of meals incurred in connection with business activities subject to the 50% limitation.
What about business travel expenses? This is a good time to revisit the deductibility of business trips. What does the IRS allow for deductions, and how should business professionals qualify their trips?
The IRS views travel expenses as “ordinary and necessary” expenses for business travel. An ordinary expense is one common and accepted in the trade or business. A necessary expense is one that is helpful and appropriate for the business. Taxpayers cannot deduct lavish or extravagant expenses or those for personal purposes.
What Is Your Tax Home?
Generally speaking, if you are traveling away for a period that exceeds an ordinary day’s work, and the trip requires overnight lodging, you can expense the trip if you are not in your “tax home.” To determine whether you are in your tax home, the IRS provides the following example:
Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals or lodging in Milwaukee because that's your tax home. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.
To determine your main place of business, the IRS looks at the following factors:
- The most important factor is the length of time you normally need to spend at each location for business purposes
- The degree of business activity in each area
- The relative significance of the financial return from each area.
What Can You Deduct?
If you have a temporary work assignment away from home, you can generally deduct your travel expenses. The key word is temporary because the IRS draws the line at indefinite work assignment, which is any assignment in excess of one year.
Travel expenses for conventions are deductible if you can show that the convention adds value to your business.
According to the IRS, deductible travel expenses include, but are not limited to, costs associated with:
- Travel by airplane, train, bus or car between your home and your business destination. (If you're provided with a ticket or you're riding free as a result of a frequent traveler or similar program, your cost is zero.)
- Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel, and the work location, and from one customer to another, or from one place of business to another.
- Shipping of baggage, and sample or display material between your regular and temporary work locations.
- Using your car while at your business destination. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking fees. If you rent a car, you can deduct only the business-use portion for the expenses.
- Meals and lodging.
- Dry cleaning and laundry.
- Business calls while on your business trip. (This includes business communications by fax machine or other communication devices.)
- Tips you pay for services related to any of these expenses.
- Other similar ordinary and necessary expenses related to your business travel. (These expenses might include transportation to and from a business meal, public stenographer's fees, computer rental fees and operating and maintaining a house trailer.)
While you can keep records of your meal expenses and deduct the actual cost, the IRS suggests you can generally use a standard meal allowance, which varies depending on where you travel. The deduction for business meals is generally limited to 50 percent of the unreimbursed cost.
If you're self-employed, you can deduct travel expenses on Form 1040, Schedule C.pdf, Profit or Loss From Business (Sole Proprietorship) or Form 1040, Schedule C-EZ.pdf, Net Profit From Business (Sole Proprietorship).
It’s good business practice to keep good records to back up all of your business expenses.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.