As a tax preparer, staying current on the latest deductions is crucial to helping your clients save money and minimize their tax liabilities. One area where you can significantly impact is business travel expenses – a confusing topic for many taxpayers. Understanding what qualifies as a business trip and which expenses are deductible can substantially affect your clients’ taxable income. This comprehensive guide will delve into the key aspects of business travel expense deductions that you and your tax clients should know.
What qualifies as a “business trip”?
Before we dive into the specifics of tax deductions for travel expenses, it’s essential to understand what constitutes a “business trip” in the eyes of the IRS. According to the IRS, a business trip is defined as travel away from your tax home (the area where your primary place of business is located) for a temporary period while engaging in activities directly associated with your trade or business. The travel must last “substantially longer than an ordinary day’s work” and require sleep while away in order to “meet the demands of work”. This definition encompasses a wide range of scenarios, from attending client meetings in another city to visiting a trade show or conference relevant to your profession.
It’s important to note that commuting between your home and your regular place of business is not considered a business trip and, therefore, isn’t deductible. Even if your client lives hours away from their place of work and sometimes stays in a hotel to be near work, these aren’t considered deductible business travel expenses since they are not traveling away from their tax home.
The IRS also specifies that the travel must be temporary, not indefinite, to be deductible. If the work assignment lasts longer than a year, it is considered indefinite.
Which travel expenses are tax deductible?
Now that we’ve clarified what constitutes a business trip let’s explore the types of travel expenses that your clients can potentially deduct from their tax returns. The IRS’s general rule of thumb can be summed up in two words: “ordinary and necessary.” The expenses should cover things ordinarily required for travel or a specific type of work. Things like hotels, meals, transportation, use of your own car, dry cleaning, and business calls all fall under this category.
On the other hand, expenses that are considered lavish, extravagant, or personal aren’t deductible. So if your client traveled for work but stayed a few extra days for sightseeing, they could only deduct the expenses related to work.
Domestic travel expenses
The cost of transportation to and from the business destination is generally deductible. This includes airfare, train tickets, bus fares, and expenses related to driving a personal vehicle. Expenses for personal vehicles are usually calculated using the standard mileage rate but can also be calculated using actual costs such as fuel, tolls, depreciation, and parking fees.
If your client uses their vehicle for both work and personal use while traveling, they must allocate expenses accordingly. Encourage them to keep accurate records of their travel expenses, including receipts and mileage logs.
Accommodation expenses incurred during business trips are deductible. This includes hotel charges, Airbnb rentals, and other temporary lodging costs. However, extravagant accommodations may be subject to limitations.
Meals and entertainment
The IRS allows a deduction of 50% of the cost of meals, while entertainment expenses are usually not deductible. You can deduct 50% of meals by using the meal’s actual cost or the Standard Meal Allowance. The SMA is typically less than the actual cost of a meal, but it does help simplify record-keeping.
International travel expenses
International travel expenses are deductible and generally follow the same guidelines as domestic travel expenses, but they are more likely to be scrutinized closely by the IRS. If your client spends more than 25% of their time abroad on personal travel, they must carefully allocate expenses and only include those directly related to work. However, if they were outside the U.S. for less than a week or less than 25% of their time was spent on non-business activity, they generally would not need to allocate expenses. Either way, encourage them to maintain careful records of their expenses to defend their deductions.
How to deduct travel expenses
To ensure your clients make the most of their business travel deductions and avoid scrutiny from the IRS, work together to:
- Maintain Detailed Records: The key to successful deduction claims is meticulous record-keeping. Encourage your clients to keep all receipts, invoices, and records related to their business travel expenses.
- Document the Business Purpose: Ensure that your clients clearly document the business purpose of each expense. This helps substantiate the deduction and provides a clear record for any potential IRS inquiries.
- Separate Business and Personal Expenses: Advise your clients to keep their personal expenses separate from their business expenses during a trip. To allocate expenses from international trips, the IRS instructs you to use a fraction where “the numerator (top number) is the total number of business days outside the United States. The denominator (bottom number) is the total number of business and non-business travel days.” You would then divide your client’s business expenses accordingly.
- Understand Per Diem Rates: The IRS provides standard per diem rates for meals and incidental expenses (M&IE) based on the location of business travel. Using these rates simplifies the process of deducting meal expenses without the need for detailed receipts.
As a tax preparer, you’re likely familiar with Form 8275, which can be a valuable tool when dealing with complex deductions like business travel expenses. This form is used to disclose positions taken on a tax return that might be contrary to IRS regulations. If any of your client’s travel-related deductions could be called into question, consider using Form 8275 to provide additional transparency. In cases where the tax code is unclear about the deductibility of certain expenses, Form 8275 can serve as a way to provide your reasoning for taking the deduction, helping your client potentially avoid accuracy-related penalties if the IRS disagrees with your interpretation of the tax code.
Staying informed about business travel expense deductions is a crucial aspect of your role as a tax preparer. By understanding what qualifies as a business trip, which expenses are deductible, and the best practices for documenting and claiming these deductions, you can help your clients maximize their tax savings while complying with IRS regulations.
Have specific questions about your client’s business travel expenses? You’ll find all the details in the extensive IRS Publication 463 (2022), Travel, Gift, and Car Expenses.