When you work under employment, then your boss will probably handle the business travel tax deduction for you. However, if you are self-employed, then you will have to handle the travel tax mess all by yourself.
Can you get deductions for business travel? What can be deducted - and most importantly, how can you deduct travel expenses? Read on and find out how you can tackle business travel deductions.
Note: If you want to track all your travel tax deductions, try the best expense tracker on the market, Bonsai Tax. Our app will scan your bank/credit card receipts to discover tax write-offs you can claim from your tax bill. In fact, users typically save $5,600. Claim your 7-day free trial today.
Are Business Travel Expenses Taxable?
Yes, business travel expenses are taxable. In most cases, the employer will reimburse the employee's business expenses for that trip. This may include food, transportation, lodging, or incidental expenses that could not have been avoided.
When filing for tax deductions, you may deduct the costs of your business expenses as well. Self-employed individuals may deduct their income tax by using Schedule C. This is found within the freelancer tax Form 1040 - a form that every self-employed person has to complete every year.
What Is a Business Trip for Tax Purposes?
The IRS has a few simple guidelines when it comes to determining the taxability of a business trip. In most cases, a business trip for tax purposes meets the following rules:
The trip must be mostly business
You need to be somewhere far away from your listed "tax home"
It needs to be an "ordinary and necessary" expense
When calculating your travel tax deductions, the IRS will measure the time spent away in days. If you spend most of that time doing business-related activities, then it's considered "mostly business." You'll still be able to get tax deductions, even if you went sightseeing for a couple of hours after a long day of business.
That being said, if most of the trip implies personal activities - i.e., a lot of sightseeing while occasionally doing business - then you might not be able to get business travel tax deductions. This is because the IRS doesn't see the activity as related to your business unless at least 50% of the activity is spent on business.
The only exception to this is when you are traveling outside the U.S. When traveling abroad, you'll only have to spend about 25% of the time doing business - not the full 50%. The only condition is that the trip needs to be exactly this: a business trip for business purposes.
Are Meals on Business Trips Tax Deductible?
Yes, meals on a business trip are tax-deductible. With that in mind, there are certain strict limits for that as well. If the meal takes place in the company of your business partners - those you traveled to do business with - then the meal enters the category.
On the other hand, circumstances may affect whether the meal is considered "ordinary and necessary" or not. For instance, you may be able to deduct the cost of a meal eaten alone. However, you may only do that if you are dealing with an overnight trip.
You may also deduct the partial costs of the meal if you entertain guests traveling to your main place of business, as long as you meet the IRS rules for meals and entertainment write-offs. With that in mind, you may only be able to get about 50% worth of the business expense.
If you are traveling abroad and want to simplify your record-keeping, then you may want to consider electing the Standard Meal Allowance (SMA). While you still have to keep a record of where you were and why you were there, you do not have to bother much with the meal expenses.
There are a couple of disadvantages that you'll want to keep in mind. The main one is that the Standard Meal Allowance is not that generous. There is a very big chance that your business travel expenses would be much higher than what is covered by your Standard Meal Allowance.
If you want to get the most out of your travel expenses, then you should hang onto the receipts for taxes and calculate the expenses as well. This way, you will be able to deduct the cost of the trip to a much more convenient rate.
Note: If you want an easy way to track business receipts and business meals, try Bonsai Tax. Our app will automatically organize your tax deductions from your bank/credit card expenses and save you thousands of dollars. Typically, users save $5,600 from their tax bill. Try a 7-day free trial today.
What Travel Expenses Are Deductible for the Self-Employed?
As a self-employed individual, you may be able to deduct the following travel expenses:
Business Mileage and Transportation
Transportation is typically tax-deductible, regardless of its nature. This includes the cost of going by airplane, bus, car, or train. Uber rides are also tax-deductible if that is your main way of going around. Baggage fees are business-related, which means they may be deducted as well.
Keep in mind one thing. If a client is responsible for covering your transportation costs, or if your ticket was booked using frequent flier miles, then your travel expenses are not deductible. After all, you won't be paying anything here.
If the conference that you are planning to attend is asking for an entrance fee, then you may have that deducted as well. You just need to prove that the reason for being there is business related, in which case you may get tax deductions.
If you need to pay tips as well, then these can be deducted. In some cases, tips are given on separate receipts - so, to prove that your tip was given for business reasons, you may want to hang into it.
When it comes to business travel, you may get a deduction for business meals worth 50%-100% for all the food. This includes the food outside the business meeting as well. The percentage depends on where precisely you got the food from.
For instance, the 2021-2022 tax rules for business travel deductions say that you can get up to 100% deductions if you get your meals at a restaurant. However, if you choose the grocery store or decide to grab a burger at your airport terminal, that'll be only 50%. Make sure that you keep the receipts for everything that you consume.
Since you will be traveling to a different place of business, away from your tax home, there is a good chance that you'll need to book accommodations as well. This is particularly the case when you cannot avoid an overnight stay.
Various types of business travel expenses can be covered here. This includes motels, hotels, accommodations on AirBNB, and Craigslist sublets. You may even get business travel deductions in case a friend allows you to stay on their couch. You just need to bring proof of it.
Communications and Wi-Fi
If you are traveling away from your main place of business and you need Wi-Fi - whether it's at home or the hotel, then you'll be glad to know that it is tax-deductible. This will apply to other necessary communication expenses, such as international calls or hotspots.
Bear in mind that this only applies when you need to apply an extra fee. For instance, most hotels do not charge extra for Wi-Fi, as it is part of the accommodation's package. Since that part's already been deducted, you can't deduct it separately.
If shipping outside the U.S. is considered an ordinary and necessary business expense, then you should know that these expenses are also tax-deductible.
For instance, you may need to be shipped some extra clothing. Or you may require material for the conference booth that did not fit your main transportation choice. In this case, shipping can be labeled as business travel expenses, and you will get tax deductions for it.
If you are traveling for a longer period during your business-related trip, then you may also have laundry and dry cleaning to consider. After all, you must look your best during your trip. Luckily for you, laundry is tax-deductible, so you may put that down as a business expense.
Note: The best way to maximize your deductions and track all your travel expenses is to use a software like Bonsai Tax. Our app will scan your receipts/records to discover tax write-offs you can submit to the IRS for deductions. Users typically save $5,600 from their taxes. Try a 7-day free trial today.
Expenses that Don't Get Business Deductions
You may be tempted to try to get everything written off under business travel expenses. However, not everything falls under "ordinary and necessary," so you need to be very careful about what you are trying to write off.
Here are some common things that you cannot get deductions for:
The Costs of Bringing Your Spouse or Children
Picture this: you are a self-employed person going on a business trip to Paris, and your spouse wants to tag along for a "second honeymoon." You need to remember that if you accept that, the costs are going to get slightly trickier, as you will be paying for two people now.
In most cases, the cost of bringing another person on a trip with you is seen as a personal expense - which means you will not be able to get business expenses out of it.
There are only certain circumstances in which you may be able to deduct the business travel expenses of your spouse or child. These circumstances are as follows:
They are an employee or your business partners, which means they would need to travel with you.
They have a very good reason for traveling with you, one that relates to your business.
They have the means or would be allowed otherwise to deduct those travel expenses by themselves.
If you can give a good explanation as to why they are there with you and how it fits your business, then you may be able to get tax deductions for them as well.
Certain Hotel Charges
Some hotel charges may be a no-brainer, but not all of them are tax-deductible. They need to be entirely for business if you want them to be tax-deductible. This means that lavish or extravagant features are not needed.
Hotel expenses for a self-employed individual, in most cases, cover sleep or rest. Additional charges such as movie rental fees, gym fees, or game rental fees are not covered. These are considered personal expenses, as they are not necessary for your business to succeed.
Again obvious, but even if work brought you there, you cannot cover everything as a business expense. For instance, if you decide to take a stroll at a local library or attempt to visit some museums while you are there, then you will not get deductions for that.
This is because they are considered private activities that are not related to your place of business. You may be away from your tax home, and you may want to fill your time with something interesting until the conference takes place, but that doesn't mean you need it as well.
Sure, if your conference or business meeting takes you to these places, then you may receive tax relief for this. However, if it's just you and your curiosity, then you shouldn't try to get something out of it.
Penalties for Disallowed Deductions
As someone who just started a small business and doesn't yet have a good hang of how the tax system works, you may be tempted to throw everything on the form and see what you can get a deduction for. Still, things are not that simple.
If you put in expenses that are not deductible, the IRS won't gloss over them with a "nice try." Instead, you may receive a potential penalty for it. This may happen under the following circumstances:
The deduction wasn't a legitimate one at all, and it shouldn't have been placed there in the first place
The business expenses were indeed legitimate, but you don't have the documents to prove it (i.e., you misplaced or threw away the receipts)
In most cases, you will receive a 20% penalty - however, that penalty is not automatic. Typically, it only applies if you are allowed substantially less deduction than what you originally calculated.
For the IRS, "substantially less" is about 10%. Usually, the only circumstance when you would reach this percentage is if the IRS disallowed multiple tax expenses that you tried to get.
The total penalty is typically 20%. This percentage is the difference between the payment that you normally should have made and the actual payment that you made.
In the end, this will mean that you'll have to pay a total of 120% of your tax obligations: the main 100% that covered your expenses, and the other 20% covering the penalty.
General Rules or Business Traveling
To be sure that you do not incur penalties for the wrong expenses and claim the right tax relief, here are some general rules that you will need to follow:
You Need at Least 100 Miles Distance
For it to be a deductible business expense, the destination must be at least 100 miles away from your tax home. These types of expenses are generally not deducted as "business travel" if you are still in the city or general area. You only get tax relief if you are required to sleep or rest somewhere else aside from your house.
You'll Have to Work Regular Hours
Even if your business takes you away from your tax home, you still need to work regular hours. This means that you'll have to cover 8 hours' worth of business activity.
What happens during the evening or on the weekend is no one's business, but you must cover your work quota. You can't log for half an hour on your laptop on your way to Disneyland and then claim it's a business trip.
That being said, if you live in San Diego and you need to attend a conference in California City, then your business expenses will be covered. As long as you go to the business conference during the day, you can go to Disneyland in the evening or during the weekend, and it will still be a business trip.
The Business Trip Needs to Last Less than a Year
If you live in a place for more than a year, it's no longer just business travel - you're basically living there. However, it won't affect your tax claims if you travel for 6 months on separate occasions.
For instance, let's say that you are a freelancer from San Diego that gets most of their 1099 work from Upwork. To improve your client network, you decide to go during the summer to Seattle, where your sister lives.
While you are in San Diego, you may be spending personal time with your sister as well, but you'll be working regular hours. This means that your expense will figure under business travel, and you may claim tax deductions.
Can Digital Nomads Claim Travel Expenses?
We live in a time when a lot of people have moved their work to the digital field. Freelancers choose to work remotely as they travel the world. But can they claim tax deductions as they go?
That depends on the circumstances and why you are traveling in the first place. For instance, if you have a legitimate reason to relocate to a different area, then you may get tax deductions for that.
You may need to travel in order to meet some clients with whom you want to collaborate. Or maybe you need to attend a conference, after which you decide to extend your case. Legitimate reasons brought you there, so you may refer to it as business travel.
However, if you live in California and decide to take your software development work to the Maldives simply because you like the place better, then that's not business traveling. You have no legitimate reason to be there for work, so you don't get tax deductions for it.
The Bottom Line
As long as you meet the requirements set by the IRS, you may claim deductions for actual expenses during business travel. Make sure that everything is calculated accordingly so that you do not get penalties for trying to claim the wrong tax. If you have only begun your small business, then you might want to get a tax advisor to help you calculate your business travel expenses and taxes.
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