Whether you are a practice owner, work as an associate and get paid as a 1099 contractor, or do some consulting on the side, keeping track of your allowable business expenses to write off against that income is an important step towards minimizing your taxes.
Each year, we hear from clients wondering whether they can claim some or all of the costs associated with their great summer trips. Generally, visiting a friend’s office for a few hours during a weeklong trip won’t meet the threshold to make the trip fully deductible. There are different rules whether your trip is within the US or you travel abroad.
Let’s take a look at the IRS rules for deducting travel from their IRS Publication 463, Travel, Gift and Car Expenses.
For travel within the US:
The following discussion applies to travel in the United States. For this purpose, the United States includes the 50 states and the District of Columbia. The treatment of your travel expenses depends on how much of your trip was business related and on how much of your trip occurred within the United States. See Part of Trip Outside the United States, later.
Trip Primarily for Business
You can deduct all of your travel expenses if your trip was entirely business related. If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct only your business-related travel expenses. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination.
Example.
You work in Atlanta and take a business trip to New Orleans in May. Your business travel totals 900 miles round trip. On your way home, you stop in Mobile to visit your parents. You spend $2,165 for the 9 days you are away from home for travel, non-entertainment-related meals, lodging, and other travel expenses. If you hadn’t stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $1,633.50. You can deduct $1,633.50 for your trip, including the cost of round-trip transportation to and from New Orleans. The deduction for your non-entertainment-related meals is subject to the 50% limit on meals mentioned earlier.
Trip Primarily for Personal Reasons
If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. However, you can deduct any expenses you have while at your destination that are directly related to your business.
A trip to a resort or on a cruise ship may be a vacation even if the promoter advertises that it is primarily for business. The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, won’t change what is really a vacation into a business trip.
For Travel Outside the US:
If any part of your business travel is outside the United States, some of your deductions for the cost of getting to and from your destination may be limited. For this purpose, the United States includes the 50 states and the District of Columbia.
How much of your travel expenses you can deduct depends in part upon how much of your trip outside the United States was business related.
Travel Entirely for Business or Considered Entirely for Business
You can deduct all your travel expenses of getting to and from your business destination if your trip is entirely for business or considered entirely for business.
Travel entirely for business.
If you travel outside the United States and you spend the entire time on business activities, you can deduct all of your travel expenses.
Travel considered entirely for business.
Even if you didn’t spend your entire time on business activities, your trip is considered entirely for business if you meet at least one of the following four exceptions.
Exception 1—No substantial control.
Your trip is considered entirely for business if you didn’t have substantial control over arranging the trip. The fact that you control the timing of your trip doesn’t, by itself, mean that you have substantial control over arranging your trip.
You don’t have substantial control over your trip if you:
- Are an employee who was reimbursed or paid a travel expense allowance, and
- Aren’t related to your employer, or
- Aren’t a managing executive.
“Related to your employer” is defined later in chapter 6 under Per Diem and Car Allowances.
A “managing executive” is an employee who has the authority and responsibility, without being subject to the veto of another, to decide on the need for the business travel.
A self-employed person generally has substantial control over arranging business trips.
Exception 2—Outside United States no more than a week.
Your trip is considered entirely for business if you were outside the United States for a week or less, combining business and nonbusiness activities. One week means 7 consecutive days. In counting the days, don’t count the day you leave the United States, but do count the day you return to the United States.
Check out the IRS Publication 463, Travel, Gift and Car Expenses for additional travel related rules.