Most small business owners travel out of town on business. Some do this frequently; others only occasionally. Either way, the cost can mount up. Certify reported that the average annual cost of a business trip in the U.S. is $949 for plane tickets, hotel fees, and other expenses. Being able to deduct travel costs can provide significant financial relief for a small business. However, tax rules for business travel are not always straightforward, placing a number of limitations on deductions for an owner’s travel expenses.
Tax Rules for Business Travel
Deductions for Travel Depend Upon the Purpose of Your Trip
Business owners may try to combine pleasure with business by taking time for personal pursuits during the course of a business trip. This may be desirable, especially during the summer season when family members may accompany a business owner on a trip. What this means from a tax-deduction perspective depends on whether the travel is domestic (within the U.S.) or foreign.
For domestic travel, you can deduct 100 percent of your airfare on a trip if the purpose is primarily for business. This is so even if you spend time sightseeing, visiting family, or playing golf. There is no bright line for determining the meaning of “primarily,” but if you wouldn’t have taken the trip but for the need to conduct business, you likely pass the test. However, your hotel/motel and meals on the days for personal pursuits is nondeductible. And you can’t deduct any of the costs for nonbusiness companions.
If the trip is not primarily for business, then no part of the airfare is deductible. You can, however, write off expenses that are for business, such as lunch with a vendor.
Rules for foreign travel are in IRS Publication 463.
Only 50 Percent of Meals are Deductible
Even though your travel is all for business, you can only deduct half of your meal costs. This includes your own meals as well as those you pay for while hosting business people, such as customers, vendors, and prospects.
The Cost of Attending Conventions May be Deductible with Limitations
You can deduct the cost of attending a convention if attendance benefits your business. However, there are a number of limitations:
- You can’t deduct expenses for your family or other non-business companions who accompany you.
- You can’t deduct expenses for conventions held outside the North American area (countries are listed in IRS Publication 463) unless it is reasonable to hold the convention outside this area (based on the activities, sponsoring organization, and other factors) and the meeting is directly related to your business.
- If it’s on a cruise ship, deductible costs are limited to $2,000 per year.
You Must Have Good Records to Claim Deductions
The tax law imposes special substantiation rules when it comes to travel expenses. Receipts are not sufficient to deduct travel costs. You also need a record, such as a diary, expense account, or app, that contains the following information:
- Cost of each separate travel expense, such as lodging, meals, and incidental expenses
- Dates for leaving and returning for each trip
- Destination of the travel
- Business purpose for the expense or the business benefit gained or expected to be gained
Per Diem Rates Can Cut Record Keeping
You may be able to use certain government-set per diem rates to substantiate the cost of business travel. This eliminates the need to keep track of the amount of expenses. There are various per diem amounts:
- A federal per diem rate (set by the General Services Administration) for lodging, meals, and incidental expenses,
- A standard meal allowances and
- An IRS high-low rates for lodging, meals, and incidental expenses.
Even if your business uses per diem rates for rank-and-file employees (such as reimbursing them at these rates), business owners (those owning more than 10 percent of corporate stock as well as self-employed individuals) cannot use the federal per diem rate or the IRS’s high-low rate for lodging; only the actual cost of lodging is deductible. They can use the standard meal allowance. If owners use the standard meal allowance, it merely alleviates the need to keep receipts; other recordkeeping is still required.
Set up good business practices to track travel expenses so you can claim the deductions to which you are entitled. Work with your CPA or other tax advisor to optimize the tax results of your business travel.
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