Travel expenses are a favorite deduction of many clients, as they love to travel and especially enjoy it when the IRS is subsidizing a share of the costs. However, to reduce travel costs, you must demonstrate that expenses have a business purpose and are commonplace and are necessary for business.
Travel expenses are a favorite deduction of many clients, as they love to travel and especially enjoy it when the IRS is subsidizing a share of the costs. However, to reduce travel costs, you must demonstrate that the expenses have a business and a usual purpose and are necessary for business.
Travel expenses for business purposes include:
- Meet customers / prospects / vendors who live in different locations;
- Search for investment properties;
- Meet with business partners, both current and prospective; And
- Holding an annual shareholder meeting (usually held in conjunction with the annual board meeting).
The phrase “usual and necessary” is generally defined to mean, “in the course of an ordinary business” and that “costs will contribute to business success.”
If a taxpayer is traveling to a destination and while at that destination is engaged in business and personal activities, the cost of travel to and from the destination is deducted only if the travel is related primarily to the taxpayer’s trade or business.
If the trip is primarily personal, the cost of travel to and from the destination is not deductible even if the taxpayer is involved in business activities while at the destination. Expenses while at the destination which are directly related to the taxpayer’s trade or business are deductible although travel expenses to and from the destination are not deductible.
Whether the trip is primarily business-related or personal depends on the facts and circumstances in each case. The amount of time during a travel period spent on personal activities compared to the amount of time spent on business is an important factor in determining the reduction in travel costs. Generally, if business is conducted more than 50% of the time in an eight hour working day, travel expenses are deducted.
Travel expenses incurred on behalf of spouses, dependents or other individuals accompanying taxpayers are not deductible. However, if a spouse, dependent or other individual is a taxpayer employee or has a bona fide business purpose, travel expenses are deducted.
Travel expenses involving cruises are usually non-deductible.
However, they are deductible if you attend a convention on a cruise ship and you can demonstrate that presence benefits your trade or business. No deductions for cruise ship fees are permitted for meetings related to personal investment, political causes or other purposes.
There are additional restrictions with regard to cruise ship travel.
For example, there is a $ 2,000 annual limit on shipping conventions and you must attach a written statement to your tax return that includes certain facts about the convention.
Usually, expenses require simple documentation such as receipts.
However, travel costs require additional documentation. If the IRS finds the taxpayer does not have adequate documentation, the costs will not be deducted. Taxpayers must document the amount, time, place and business purpose of travel expenses.
Adequate business expense documentation includes receipts, canceled checks, or invoices. Although contemporary logs are not required, we usually recommend that our clients keep a business travel plan that lists all business activity as documentation of travel expenses. Logs should list all expense elements (eg, amount, time, place and destination) as this has high credibility with the IRS. Documentary evidence, such as receipts or bills paid, is generally not required for expenses less than $ 75. However, the IRS has decided that all lodging expenses must be documented.
Taxpayers can deduct the standard allowance as set by the federal government.
This is called per diem reduction. In lieu of a receipt, the taxpayer will deduct the per diem rate. Reduction of Per Diem travel costs is not allowed for owners.
Good news for those who hate keeping track of all those pesky receipts when they travel. The IRS will allow you to reduce food and incidental expenses for trips away from home even without a receipt. This is their Per Diem Benefit program.