(UPDATE: A newer version of this article can be found here.)
This is the second in a series of posts on tax deductions for small business owners. If you need help understanding some of the specific tax terms that appear here (like “deduction” and “expense”), see the first few paragraphs of this post.
My coaching business requires that I fly all over the country to meet with my clients. Can I deduct my travel expenses?
Generally speaking, expenses for transportation, meals and lodging are tax deductible for business travel away from your tax home. Your “tax home” includes your city or the general area where you regularly conduct your business, and is determined without regard to where your actual home is located. In fact, a Tax Court memo from January 2010 specifically stated that a taxpayer’s “tax home” is his or her principal place of employment, and not necessarily where a personal residence is located.
To deduct travel expenses, you must stay away from your tax home longer than an ordinary work day — and by that the IRS means eight working hours. This stipulation is known as the “overnight rule,” meaning that you must be away from your tax home basically for 24 hours or long enough to require sleep.
In order for transportation, meals, and lodging to be fully tax deductible, the trip must be taken entirely for business purposes. This is true for both domestic and international trips.
Whether a trip is primarily business or personal depends upon the facts and circumstances. If you spend more time lying in the sun by the pool versus attending
workshops while at a conference in Miami, the IRS might reasonably raise an objection to your taking the full deduction for those travel expenses. But if your attendance at a conference in sunny Miami directly benefits your trade or business and you spend more time attending workshops than at the pool, then you probably have a legitimate claim to the deduction.
So what, then, may I deduct?
Traveling by air: Deduct your entire airfare.
Traveling by car: All transportation costs are deductible.
Hotel room: Deduct only the single rate.
Meals: Deduct all your meals. (Note, however, that the tax deduction for meals is generally limited to 50% of the cost.)
AN IMPORTANT WORD ABOUT RECORD KEEPING
If you take nothing else away from this post, note this — there are very specific requirements for substantiating tax deductions taken for travel expenses, and the importance of keeping accurate records cannot be overemphasized.
At a bare minimum, keep all your receipts, on which the hotel’s or restaurant’s name and location should be clearly noted.
Depending upon how much you travel for business, you should also consider keeping a diary or log book of all your travel details. The log book should include the amounts of each separate expense for transportation/meals/lodging, the dates you left for and returned from your trip, the name of the place you went, and the business reason for the travel.
It’s easier though far less sexy to record these details at the time rather than try to remember them months later while preparing your taxes…or worse, magically try to conjure up your receipts and records during an IRS audit.
Just put a nice little Moleskine in your purse or pocket, or use one of the many apps on your smartphone.
Please note that this post serves as just a broad overview of deductible travel expenses and shouldn’t be relied upon as tax advice. There are various other rules for temporary vs. indefinite work assignments, cruise ship conventions, and travel expenses for another individual.
For more information, see IRS Tax Topic 511, which unlike a lot of IRS publications isn’t a dreadful read, or talk with your tax adviser.