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The category of travel expenses is one of the most commonly encountered type of business tax deduction. However, this category is also one of the most confusing! When is the cost of a trip deductible as a business expense? How about conventions — particularly in other cities? Can you deduct the cost of getting there and your expenses while you're there? What if you bring your family? It will be easier to plan your business trips, and to combine business with vacation when possible, if you become familiar with the IRS's ground rules.
You can only deduct travel expenses if they are ordinary and necessary expenses that you incur traveling away from home in connection with the pursuit of an existing business. You can't deduct travel expenses to the extent that they are lavish or extravagant — the expenses must be reasonable considering the facts and circumstances. However, the IRS gives you a great deal of latitude here. Your expenses won't be denied simply because you decided to fly first class, or dine in four-star restaurants.
The expenses have to be incurred for an existing business — travel expenses you incur in connection with acquiring or starting a new business are not deductible. However, you can add these costs to your startup expenses and amortize them over 60 months.
Business travel vs. personal travel. What about travel that has a combined business and personal aspect? Here's where it gets a bit more complicated. The IRS is on the lookout for taxpayers who might try to classify a nondeductible personal trip as a deductible business trip. So, if you travel to a destination and engage in both personal and business activities, you can deduct your traveling expenses to and from the destination only if the trip is primarily related to your business.
If the trip is primarily personal in nature you can't deduct any of your airfare, hotel, or other traveling expenses. This is true even if you engage in some business activities while you are there. (You may be able to deduct particular expenses you incur while you're at your destination if they otherwise qualify as business deductions; for example, cab fare to an isolated business appointment.)
The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business. Travel expenses outside the U.S. may be further limited if part of your trip is for personal purposes.
Claiming your travel expenses. Sole proprietors claim their travel expenses on Line 24a of their Schedule C, except for any meals or entertainment expenses while traveling. The full amount of meals and entertainment costs must be reported separately on Line 24b; the tax form asks you to compute 50 percent of this amount on the face of the form to make sure that you're only deducting half of the expenses.
There are a number of more specific rules to be aware of regarding travel expenses:
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