Maicher CPA Pllc provides a full range of tax preparation services to help businesses and individuals succeed. Reducing your tax bill by maximizing deductions is a primary objective at Maicher. Many of us have upcoming travel plans this summer and certain expenses resulting from business are clearly deductible. Deductions, however, get far more complicated when a couple days of hiking in the mountains mixes with days with your trip to meet a customer, or prospective customer? Consider these suggestions to avoid trouble with the IRS.
- What’s the general rule about travel expenses deductibility? Generally, “ordinary and necessary” travel expenses for business purposes are deductible as a business cost. Also, “travel” in this context means a trip requiring you to leave your tax home for longer than a normal workday and with the intention of pursuing a business purpose like meeting with existing or prospective clients. The business purpose should be documented and planned in advance with dates identifying the specific persons you intend to meet and for what purpose. For example, to sell product, or to buy it? Also, be aware that travel outside the U.S. can provide fatter deductions over domestic travel. For example, if you spend two days conducting business during a five-day international trip, you can deduct the airfare’s entire cost as a business expense—because two days out of five is equivalent to 40% of your time away.
- What are common deductible expenses? Examples of common deductible travel expenses incurred between your usual place of business and your destination are: round trip travel to the departure airport, airfare (even the cost of first-class tickets particularly on longer trips, baggage fees, tips, cabs, and similar expenses. At the destination, out-of-pocket expenses are broadly construed for “business days” and fully deductible. The usual expenses like lodging, meals (up to 50%), and cab fare are deductible but even more obscures expenses like dry cleaning/laundry are covered.
- When are expenses deductible when travel mixes business purposes with non-business purposes? In these cases, the IRS used the “Primary Reason” test to determine deductibility. Transportation costs to and from the location of the business activity may be entirely deductible if the trip’s primary reason is for business purposes other than for non-business purposes, like running a marathon or visiting an old friend who’s retired. college campus visit, for instance. The number of days spent on business activities versus non-business activities is key to determine whether business is the primary reason for travel. Be aware that travel days count as business days, as do weekends and holidays — if they fall between days devoted to business and it would be impractical to return home. Generally, a trip’s primary reason is deemed to be for business if business activity days exceed non-business activity days. As always, taxpayers have the burden to prove the trip’s business purpose and documentation like receipts, daily activity diaries and other materials identifying your business contact and the purpose of the meeting.
Take away: Business travel can result in substantial deductions, including when it mixes with personal frolic subject to the above rules. At Maicher, we provide effective tax advice and tax return preparation services minimizing tax bills for individuals and businesses. Contact a professional at Maicher today to discuss how we can reduce your tax bill.
Publication 463 – Travel, Gift, and Car Expenses (IRS Pub. March 28, 2022).
Topic Number 511 – Business Travel Expenses (IRS Pub. February 17, 2022).