Deduction for Non-Local Travel Expenses

As a business owner, it’s likely that from time to time, you will find it necessary to travel away from home for business reasons. Generally speaking, the trip qualifies as a business expense as long as:

1. you are away from your tax home, and
2. the trip is ordinary and necessary for your business

For the most part, your tax home is the city or general area that includes your primary place of business. Interestingly enough, for these purposes, it does not matter where your family home is. That said, note that travel between your tax home and your family home is not business-related, and is not deductible.

Away from Home

You are “away from home” anytime you are required to either 1) stay away from your tax home for significantly longer than an ordinary work-day, or 2) need to sleep while away from your tax home in order to meet your work’s demands. The IRS has consistently determined that simply napping in your car, however, does not meet requirement #2.

What’s Deductible

If your trip is entirely for business purposes, all of the following costs are deductible:

1. Transportation (both to your destination as well as local travel once there)
2. Lodging
3. Dry cleaning/laundry
4. Any shipping costs for your baggage.
5. 50% of meals (covered later)
6. Any other expense which is ordinary and necessary and related to your travel.

Deductions for Meals While Traveling

When determining the amount of your deduction for meals while traveling, you have two options. Your first option is to keep track of your actual meal expenses while traveling for business. Your can then deduct 50% of the cost of those meals. The justification for only allowing you to deduct 50% of your meal expenses is that Congress assumes you would already be spending at least some money on meals even if you weren’t traveling (presumably, approximately half as much).

Your second option is to use a number referred to as the “per diem rate” as a substitute for your actual meal costs. The per diem rate is a number that varies based upon the location of your travel. For 2008, the per diem rates range from $39-$64. You can find a listing of the per diem rates by city in IRS Publication 1542.

If you use the per diem rate as a substitute for actual meal costs, you are still only allowed a 50% deduction. For example, if you were traveling for business for three days to a location with a per diem rate of $60, your deduction for meals would be calculated as:

• ($60 per day x 3 days) x 50% = $90

Travel Not Exclusively for Business

The above discussion applies only if you are traveling within the United States, and your trip was entirely for business. If your trip was primarily for business, and while you were there, you extended your stay for personal reasons, you can deduct only the costs of the business-related travel expenses. If your trip was primarily for personal reasons, the entire cost is nondeductible, even if you engaged in some business while on the trip.

Let’s say you took a five-day trip to Florida with a friend of yours who also happens to be a client. If over the five days, you spend most of the time at the beach, your expenses will be nondeductible, even if you end up having a business conversation over lunch at one point.

If your trip is outside the United States, and is exclusively for business, the same rules apply as if it were within the U.S. (That is, the entire trip is deductible, with the exception of 50% of your meal costs.) If your trip is outside the U.S., and is primarily for business purposes, the same rule applies as above, in that you can deduct only the business-related travel expenses. However, you must also remove from your deduction a portion of the actual transportation costs. The amount of the transportation costs you are allowed to deduct is determined by allocating the transportation costs to business use and to personal use based upon the number of days spent for each purpose.

For example, if your trip is 9 days long, and 6 of them are business-related, you can deduct 2/3 of your transportation costs. If your trip outside the U.S. was primarily for personal reasons, the entire cost is nondeductible, even if you engaged in some business while on the trip.

In Summary

• Whether traveling within the U.S. or outside the U.S., if your trip is exclusively for business, the majority of your related expenses will be deductible.
• When traveling inside the U.S., if your trip is primarily for business reasons, you’ll be able to deduct all of the cost of transportation, as well as the business-related expenses.
• When traveling outside the U.S., if your trip is primarily for business reasons, you can deduct a portion of your transportation cost, and all of the business-related costs.
• When traveling inside the U.S. or outside the U.S., if your trip is primarily for personal reasons, it’s going to be nondeductible.
• If the trip counts as a deductible trip, you will still only be able to deduct 50% of the cost of meals. You can either keep track of the actual cost of the meals, or you can use the applicable per diem rate as a substitute for the actual cost.

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June 6, 2009 0 comments