We’ve all dreamed of taking an all-expenses-paid vacation. Can Uncle Sam help pay for some of those expenses? Yes – and no.
Let’s look at some of the ways you can use your travel expenses to save on your tax bill – and some ways you can’t.
Why can travel expenses be deductible?
Some travel expenses can be deductible, and some can’t. Why?
The expenses that are deductible are related to money-making activities, or business travel.
The expenses that aren’t deductible are the ones related to purely personal travel and spending.
Justifiable business travel expenses are deductible because they are an expense against the money that you made during that trip.
Income is revenue after expenses, so the IRS allows you to deduct expenses that reduce your business income.
There are also rules about military travel spending, but those are a little different than regular business travel rules.
The 3 musts to deduct travel spendings
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To be deductible, travel spending has to meet three requirements.
- It must be related to business activities – as either business owner or employee.
- It must be ordinary and necessary to the business.
- It must be away from your tax home – which is not always the same as your personal home.
What do those things mean?
- Ordinary: the expense is within normal limits for the business or industry.
- Necessary: the expense is appropriate and helpful in completing your work.
- Away from tax home: you are not working at the place where you usually work or conduct business.
What travel expenses are deductible?
The following travel-related expenses are generally deductible.
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If you are self-employed or pay these expenses out of pocket as an employee, you may deduct these expenses.
If your employer pays for or reimburses some of these things, those expenses are deductible for them, not you.
If you “pay” for some of the expenses using credit card points or frequent flyer miles, those are not deductible either.
- Travel costs, such as a plane ticket, rental car, bus ticket, or fuel and mileage for a personal vehicle.
- Commuting costs, such as taxis or Uber.
- Lodging costs. These costs are only deductible if you are away from home long enough to require sleep (usually overnight).
- Meal costs. These must be ordinary and necessary, not extravagant, but cost is not the determining factor. For instance, if you are entertaining a very wealthy client with a business lunch, it’s understood that you will spend more on the meal than you might just for yourself.
- Business communication, such as cell phone, fax, or international call charges
- Tips related to any business-related services listed here. For example, this could be wait staff or a hotel porter.
- Laundry and dry cleaning services during your trip.
- Other ordinary and necessary expenses related to the business. An example could be rental fees for a co-working space.
How much can I deduct?
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Most of the expenses on this list are fully deductible, meaning you can claim the entire cost of the expense on your taxes as a deduction.
The exception is meal expenses. Only half of the cost of eligible meals can be deducted.
If you are an employee, you also have to consider things your employer may reimburse.
Anything that you do not pay out of your own pocket is not eligible for deduction.
Can I squeeze personal travel into my trip?
We know this is the question you’ve been waiting for.
There are ways you can squeeze personal travel into your trip without losing your business trip status.
For example, if you travel to a business conference in San Francisco, you might spend Thursday traveling there, Friday and Monday at the conference, fly home Tuesday, and spend the weekend exploring the city on your own.
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Since it wouldn’t make sense for you to leave the city over the weekend and come back Monday, all your lodging costs are still considered deductible.
Just make sure to spend more days on business than personal stuff, and it is still considered a business trip.
Recordkeeping
Make sure to keep meticulous records of business expenses during your trip.
There are apps where you can store photos of receipts together with an explanation of each expense. This will be important in case of an audit.
When tax time comes around, the expenses will be listed on Schedule C if self-employed, and Form 8275 if an employee.
In this day and age, it’s always important to find ways to save. If you’re traveling for business, be sure you’re aware of all the ways you can structure your trip to save later at tax time. Happy travels!
