Business travel expenses: what counts and what don't: TAX Deductible VS Non-Deductible Items
As a freelancer, small business owner, or independent contractor, you may have a tendency to travel long distances for meetings or other business-related trips. Luckily for you, many business trips are easily tax deductible, though there are rules and regulations involved, of course. The IRS states that, for a trip to be travel expense deductible, it must be business related, common in your industry, and at least 100 miles away from the city in which you usually file your taxes. With that noted, there’s also rules on what could be considered a business expense under these circumstances.
As experts in the field, we at Logica Accounting Services want to help you understand what can and what can’t be deducted as business travel expense.
As for expenses you can write off, there’s no shortage of things to mention. The rule of thumb to go by is, if it’s necessary for you to get your job done, it probably counts as a business expense. Big or small, there’s a lot of bills that come with the territory for traveling for work. Here’s a few to keep in mind:
Whether you’re driving, flying, or taking the bus, you can count the cost of your fare towards transportation. Here’s a breakdown of what to keep track of in order to do so.
- The cost of your airplane ticket, bus ticket, or rental car
- If you’re driving, the cost of gas, any maintenance preformed on the vehicle, toll fares, and parking fees
- The taxi or Uber fare to and from the airport or from your hotel to your client, work location, or business meeting
When traveling, If you’re driving to and from your business location, you can calculate the expenses one of two ways. The easier method is by multiplying your miles driven by the standard rate of 58.5 cents. This cost is meant to include not only gas, but any depreciation on the car and any repairs you may need. Of course, you can always save receipts for gas, maintenance, and repair costs yourself, though this method does require a bit more planning on your part.
2: Baggage or Shipping
Whether you’re paying to ship items to your temporary work location, shipping display materials, or simply paying for your luggage at the airport, all of these expenses are tax deductible. Always keep track of your shipping costs or luggage charges, especially so if you plan to write them off.
While you’re on a business trip, it’s only expected that you’ll need a place to stay. So, naturally, hotel stays and resort stays are tax-deductible. This is honestly one of the most useful, as, like transportation, lodging can get pretty costly, especially for an extended stay. However, you cannot deduct the lodging for anyone who travels with you, unless they work for you directly, and you have the documents to prove it.
4: Dry-Cleaning and Laundry
Surprisingly, laundry fees and dry-cleaning charges while on the road for work are tax-deductible. So, go ahead and get your best suit pressed for the business dinner, but be sure to save the receipt if you’re looking to write it off.
Whether it’s room service fees, tipping the waiter, porter fees, or cab rides, any gratuity offered for a service can be deducted. However, deductions only allow for $5 per day, and any amount above that is on your own dime. It should also be noted that if you withdraw cash for tips, an ATM receipt alone is not enough, and you will need to write down the date, location or service, and amount on the receipt.
6: Communication Expenses
Barring cell phones, as those are already deductible in a different category, you may deduct any expenses needed for communication. Whether it’s your hotel phone bill or even leasing a satellite phone, you can write off any communication expenses from a business trip. You can also write off any Wi-Fi fees you might have to pay, be they from a hotspot or otherwise. Just keep track of the bills, and you’ll be all set.
Writing off meals while travelling can be a little bit confusing, but it isn’t impossible. The IRS knows you’re going to need to eat, but they do have a few rules about it. Here’s a few of the things to be noted:
- You may only deduct 50% of the total meal cost.
- Meals must be non-entertainment related, as of 2018. This means, for example, if you go to a dinner theater show and the meal portion isn’t itemized on your bill, it cannot be deducted, as it defaults to being an entertainment expense.
- On the flip side, groceries and takeout purchased while away on business are tax-deductible, so be sure to save the receipts from those purchases as well.
Any other “ordinary and necessary” expenses on your business trip are deductible. The IRS defines “ordinary and necessary” as anything that would be expected out of a regular business trip for someone in your industry. This could be anything such as interpreter costs, transportation, or fees for renting a hotel business center. If you have any questions about this, talk to your CPA.
As for things that aren’t deductible, they’re all pretty straightforward. A good thing to keep in mind is that, if it doesn’t come out of your own pocket, isn’t your subcontractor’s fees, or isn’t necessary for your work or sustenance, it can’t be deducted. With that in mind, here’s what you won’t be able to write off.
1: Your Spouse, Child, or Friend Traveling with You
Unless the person you’re paying for is directly employed by you, you won’t be able to write off their expenses as your own. If you’re paying for a subcontractor’s expenses, however, you will be able to deduct those. In that case, you’ll need to provide the proper documentation that they are your employee when you go to file your taxes. In any case, when in doubt, ask your CPA.
Even if you’re taking a potential business partner or client for a round of golf, you still can’t write it off. Any form of entertainment, be it a session of bowling, a movie rental, or anything else done in your free time, is non-deductible. No entertainment is technically deemed necessary for business travel, so it can’t be written off as a business expense.
3: Miscellaneous Hotel Charges:
From gym fees to spa fees to game rentals, any hotel fees not necessary for your work are non-deductible. Be sure to keep your hotel bill and look it over to see what is and isn’t business related. Keep in mind that, while room fees, phone fees, tips, and laundry are considered necessary, many of the extras are not.
4: “Lavish or Extravagant Expenses”
The IRS isn’t exactly clear on what “lavish and extravagant” is, but they do say that, “an expense isn’t considered lavish or extravagant if it’s reasonable based on facts and circumstances”. This does tie in to the last two notes, as obviously anything that isn’t necessary cannot be considered a normal business expense. If it isn’t directly allowing you to work, or keeping you fed, it may be considered unnecessary.
This may be obvious, but you cannot deduct personal travel as a business expense. While many of us do work even while on the road, that doesn’t make the entire vacation stay immediately deductible. It’s a bit of a foggy area, but keep in mind that, should you work on vacation, you can only write off the expenses necessary to get your work done, and only if it is consistent, standard work for you. Taking one business-related call wouldn’t count but working at your laptop for the day while at the beach would.
6: Compensated Travel
It may seem obvious, but if your travel is being paid for by a client or employer, you cannot write it off your taxes. If, for example, you’re presenting at a conference and the event planner pays for your travel and hotel stay, you cannot deduct it from your taxes. After all, those fees did not come out of your own pocket, therefore they aren’t your responsibility to claim, but they would, however, be your client’s expenses.
Some things to keep in mind: not every trip on which you work technically counts as a business trip. As mentioned above, if you just so happen to work while on a trip, that itself doesn’t count. The IRS states that, for a trip to be considered business travel, not only must you work regular hours, but the trip itself needs to relate to business. This could range from anything such as attending a conference to the classic picture of a writer booking a secluded cabin to work on their manuscript. The trip must also last less than a year, as anything longer would be considered living in that place.
All in all, there are many expenses to keep in mind that you can indeed write off. There’s a couple of methods by which you can calculate them. The first is the traditional method of saving receipts and marking everything that fits the criteria of a necessary business expense. Another option would be to set a daily rate for lodging, meals, and incidental expenses, though that isn’t nearly as exact nor as accurate. The traditional, manual method of keeping track of each purchase or bill is typically more accurate.
In short, there are many things to keep in mind when writing off your business travel expenses, but hopefully this list has helped you become familiar with them. Business expenses are a given when self-employed, and it’s always useful to know when and what to write off. Traveling while self-employed is no different and tends to accrue bigger business expenses in the long run. If you have any questions or need advice on whether or not something is deductible, it’s always recommended to speak to a tax agent about it. With that said, best of luck to you and your business this tax season!
If you are looking for an accounting firm, reach out to us at Logica Accounting Services. We are in Long Beach, CA right in the middle between Los Angeles and Orange County. We have been helping businesses for many years to keep their money and lower their tax bills using legal methods and strategies. Our personalized bookkeeping services focus on reducing our clients’ accounting expenses by helping them with their top finance management, tax preparation, and invoice processing needs.
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