Travel, Meals, and Entertainment (Part 2 of 3)
Updated: Aug 2, 2019
“For tax purposes, travel expenses are: the ordinary and necessary expenses of traveling away from home, for your business, profession, or job; that are not lavish or extravagant.”
I'm Gabriel Velez, partner a Tehrani & Velez, LLP. We're a tax and accounting firm based out of Irvine, California, working primarily with small businesses and real estate investors and today I’m going to be talking about Travel expenses.
For business owners, the distinction between traveling and commuting is a big one because “travel expenses” bring with them special rules for transportation, lodging, and meals that are more generous than normal.
Travel expenses can include things like airfare, rail fares, taxi fares, meals, lodging, laundry expenses, telephone, tips paid, and much, much more.
Tax Home and the “Sleep or Rest” Rule
So, what is considered “travel”?
Well, in order to determine if you’re traveling, you first have to determine what your tax home is.
Your tax home is your regular place of business, and that’s regardless of where your family home is. It’s important to note that the travel between your family home and tax home is considered your commute and is not tax deductible (and it doesn’t even matter what distance your commute is, it’s just definitional).
If you have multiple places you regularly work, your tax home may be the place where you live, which is awesome, because that means you’re ALWAYS traveling OR you may be considered an itinerant (which isn’t so great) because as an itinerant (transient) you’re never considered to “travel” because your tax home is wherever you set up shop (an important distinctions!).
Generally, your daily meals and lodging are nondeductible personal expenses unless you are considered “away from home” for a period of time substantially longer than a normal work day.
There’s also this thing called the sleep or rest rule that states that, “travel away from the tax home must be of such duration or nature that the round trip cannot reasonably be expected to be completed without (the taxpayer or employee) being released from duty or otherwise stopping the performance of regular duties, for sufficient time to obtain substantial sleep or rest”. Essentially this means that your job duties require you to be in a location away from your Tax Home for more than one working day.
If you are away from your tax home and you meet the sleep or rest rule, then, for tax purposes, you are traveling.
The cost of getting to and from your destination and the cost of moving in and around your destination IS your transportation.
Your airfare, train fare, bus fare...to and from a travel destination is fully deductible provided the trip is PRIMARILY for business. It does not have to be 100% for business.
Conversely, transportation in and around your travel destination is only deductible for the time that the trip is entirely for business. This type of transportation includes taxis, commuter buses, and airport limousines you take between the airport, or train station, and your hotel. It also includes those costs incurred for moving between your hotel and the work location of your clients OR your business meeting place OR your temporary work location.
Next we’ll be talking about meals while you’re on your trip...
As with meals in or around your tax home, travel meals are generally only fifty-percent deductible. The idea behind this limitation is that you would need to eat regardless of any business motive or distance from your home.
You have two methods for figuring your meals expense. One (1) is by using the actual cost method and the second is the standard meal allowance.
The actual cost method is pretty self-explanatory. If you use this method, you must maintain records of the actual cost incurred (i.e. receipts, location, etc.).
If instead you choose to use the standard meal allowance, you get to take a deduction based off the per diem rates the IRS releases on an annual basis.
The notice the IRS issue gives a different per diem rate for “high-cost” localities and “low-cost” localilities.
Even if you use the standard meal allowance method, you still have to have to keep records proving the time, place, and business purpose of the travel. It’s also important to note that if you’re giving your employees a per diem payment instead of reimbursing actual expenses, your are to deduct the LESSER of whatever you paid them or the amount issued on the IRS notice; it cannot be more!
The last thing we’ll be talking about in this section, is paying for a place to stay, while you’re away! That’s lodging expense.
Generally, only lodging expense while traveling away from home are deductible. However, expenses paid or incurred for lodging while not traveling away from home can be deductible if they are in connect with carrying on a taxpayer’s trade or business, taking into consideration all facts and circumstances.
When you’re traveling, you’re typically only allowed a deduction for the days you’re actually working, though there are exceptions like if you’re working two consecutive weeks with a regular weekend off.