How many times have you traveled for work in the past year? How many times have you sent employees out of town on business? Ever thought that there might be some tax implications involved with your travel expenditures? In an ever growing society where service demands are running high and everything needs to be done as soon as possible, it’s unavoidable that employees will have to travel at some point during the year.
For income tax purposes, the definition of a business trip is considered travel away from home for such duration that the taxpayer may reasonably be expected to need to obtain substantial sleep or rest to complete a round trip.
Business travel expenses incurred such as airfare, lodging, phone calls, taxi fares, hotel laundry services and other incidentals are deductible. It’s almost impossible not to mix some pleasure with business travel however the primary purpose of the trip must be business-related.
Here are some guidelines to aid you in determining what portion of your travel expenses will be eligible for an income tax deduction.
- Transportation costs that are associated with the operation of a business are tax deductible as long as it’s beyond routine commuting. A taxpayer can deduct these costs when away from home in pursuit of a trade or business, as long as the expenses are not lavish or extravagant. I would not recommend renting a Ferrari to cruise around when a Camry would suffice.
- Travel for work-related education can also be deducted as long it meets one of the two requirements 1) it’s necessary by your employer or law to keep your present salary, status, or job. 2) The education must be needed to maintain or improve skills required in your present employment.
- Travel expenses incurred to attend business conventions are deductible if there is enough correlation between the attendance of the convention and the taxpayer’s business.
- Are you bringing a spouse along? In general travel expenses incurred on behalf of a spouse or other individuals accompanying the taxpayer on a business trip are deductible only if there is a bona fide business purpose for their presence and the individual or spouse is also an employee.
- Foreign travel expenses are subject to special allocation rules when an employee also engages in personal activities while traveling on business. Purely personal activities are wholly nondeductible and purely business activities are wholly deductible.
- Only 50% of business meals and entertainment expenses are tax deductible as long as they are incurred to attract or retain clients. Proper documentation should be maintained to support your deduction. I recommend keeping your receipts and notating the specific business purpose and the clients and employees in attendance.
Expenses incurred for entertainment and travel are highly scrutinized during the course of an IRS examination. Substantiation for these expenses is needed to support the deduction claimed. It is good practice to document amounts, time and place, business purpose and the business relationship of any persons entertained.
Knowledge is power. At MKSH we believe educating our client is must. Contact one of our tax professionals if you have a question about the tax deductibility of your travel expenses.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.