Making Travel Less Taxing: Introduction
Your Tax Home (Away from Home)
Airfare and Transportation
Lodging and Meals
The Nitty Gritty: Required Receipts and Tax Forms
Wait; What Happened to Lucky?
My name is Scott, and although I do enjoy diet coke and lime and consider myself to be lucky in many ways, I am not in fact your favorite blogger Lucky. I am a tax attorney and CPA based in Dallas (AA flyer, naturally). Like many of you, I am obsessed with really enjoy earning and redeeming miles and points for travel adventures. Last year, I approached Ben about authoring a series of guest posts on taxes and business travel during tax season, and he graciously agreed to provide me a forum. My hope is that my melding of my professional and personal passions in these weekly posts will be helpful to you all in your tax planning or at least provide some levity to otherwise trivial tax matters.
This initial post will discuss business travel expenses generally; in later weeks, I will highlight specific categories of deductible expenses and conclude with some practical points and a post to answer interesting questions posed by you all along the way. Please also note the legal disclaimer at the end of this post.
When Is a Travel Expense Deductible?
A taxpayer may deduct any unreimbursed expense that is ordinary and necessary in carrying on a trade or business activity. Decades of tax litigation and regulation have given meaning to those few words, but I’ll do my best to distill them down for you.
First, the expense must be unreimbursed. I have more than a twinge of envy toward those of you who are fortunate enough to have all of your travel paid for by a third party as part of your career. For tax purposes, business travel expenses are generally not deductible unless they are unreimbursed. Thus, if your employer requires you to submit documentation for all of your travel expenses and then reimburses you based on what the IRS terms an “accountable” plan, then you have no unreimbursed expenses and, as a result, nothing to deduct. Sorry to be giving you this news, but perhaps all of the miles and points you earn on another’s dime will provide some solace.
For those times when you exceed your company’s reimbursable limits, you will have unreimbursed travel expenses, but as I will discuss in more detail in a future post, unless those amounts exceed 2% of your adjusted gross income and you itemize deductions, you will not receive any actual tax benefit from those costs. So, if you have to exceed your corporate kitty limits, do so for the fun (and extra points charged to your favorite card) but don’t count on a tax benefit.
Ordinary and Necessary
Expenses that are “ordinary and necessary in carrying on a trade or business activity” are in some cases quite obvious:
- Warm nuts served to your customers in first class? Yup, deductible.
- Costs paid to consultants to integrate two companies following a merger? No argument from the IRS there (at least as to deductibility…I’ll leave the evaluation of the smoothness of such integrations to others).
- Costs incurred by a sales rep for out of town travel? Or, how about that business trip to ___________ where a few extra days are tacked on to the itinerary for a mini-vacation? Hmmmm. Let’s discuss!
Potentially deductible unreimbursed travel expenses for such a sales rep traveling away from home on business include those incurred for airfare, lodging, meals, taxis, buses, baggage fees, rental cars, the use of a personal car, telephone expenses, and even dry cleaning, among others. In future posts, I’ll explain the requirements and practicalities of deducting these specific expenses. I’ll also discuss how to allocate costs when a trip is part business and part personal.
Initially, though, let’s consider the threshold question of whether travel expenses are business related or not. For better or worse, U.S. tax law is loath to allow taxpayers to deduct personal expenses; in short, Uncle Same doesn’t want to allow you to deduct the cost of your personal home, food or clothing. These items are considered non-business related, no matter how serious you take them.
What makes travel expenses unique from more cut-and-dried business expenses like supplies or salaries is that there is often a business and personal element to travel. And, when incurred in combination with a business activity, your otherwise nondeductible expenses for items such as lodging and meals may become deductible simply because you incurred those expenses while away from home. (Yes, a meal bought for a client may be deductible regardless of whether you’re away from home, but for purposes of this discussion, let’s consider only your meal, not that of your client).
So, the definition of “away from home” becomes quite important since your ability to deduct travel expenses and realize tax savings hinges on whether you’re away from home for tax purposes. And, of course, the IRS has their own rules for determining your tax home that are at times less than intuitive…more on that next time.
Conclusion and Next Time
Thus, unreimbursed travel expenses that are ordinary and necessary to your business will not only earn you miles and points for those charged expenses but also may reduce your tax liability. In my next post, I’ll discuss the IRS’s definition of your “tax home.” Until then, feel free to leave questions in the comments! Also, you may follow me on Twitter @ScottTaxLaw or learn more about my legal and CPA practice.
Disclaimer: While I hope the information I provide will be helpful (and hopefully even humorous at times), none of this information should be construed as offering legal advice or creating an attorney-client relationship between the reader and my law firm. You should not act or refrain from acting based on this advice and should consult your own attorney or CPA regarding your specific tax matters. IRS Circular 230 Notice: Nothing in these communication is intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.