We are often asked by our clients if their travel expenses are tax deductible.
Can my vacation be considered a business trip? What expenses can I deduct when I am traveling for business away from home? What records do I need to keep?
All of these questions are important to understand as an entrepreneur. So to help you determine if your travel expenses are deductible, let’s first ask yourself the following:
Was there a profit motive in the trip?
If there is motivation for financial gain in the trip, then chances are there is profit motive involved. A profit does not have to be immediate in order for the profit motive to be there.
Was the stay overnight?
You must stay overnight in order for a trip to be potentially tax deductible. Day trips do not qualify as tax deductible.
Were most of the days business day?
Days spent traveling to the destination are considered business days. On non-traveling days, you must spend at least 4 hours on the business to be considered 1 business day. From there, determine how many of the days were business days.
Would you have gone on the trip if there was no business aspect to it?
Realistically ask yourself whether or not you would have gone on the trip had there not been any business conducted on the trip. Would a rational businessperson go on the trip for only the business reasons? If not, then you likely cannot deduct the expenses.
Types of Travel Expenses
There are two types of transportation expenses: transportation expenses and life expenses. The transportation expenses are an all or nothing expense. In order to qualify for this, you must have more business days than personal days. Otherwise, it is zero. Life expenses are different; you are only able to deduct these costs on business days. The expenses you can deduct are those that are life sustaining, such as lodging and meals. These expenses are unable to be deducted from any days that are personal days (i.e. days you work <4 hours on your business).
Maintain Good Records
It is absolutely vital to maintain good records of your trips and expenses. If you were to ever be audited by the IRS, they will require thorough documentation of each deduction and you will have to provide it. Make sure to note the amount, time, place, and business purpose for all expenses. Record the date you left and the date you returned; number of business days during the trip, business reason for traveling, and the places you went is also important to keep record of. It is much better to have too many records than not enough. When taxpayers lose court cases involving travel expenses, it is usually due to lack of proper documentation.
Keep all of this in mind when you are planning a business trip. For more personalized advice, make sure you speak with your accountant. They will be able to direct on what their preferred procedure is for documenting business travel expenses.