Business travelers who plan carefully can trim the costs of their trips. Generally, “ordinary and necessary” business expenses are deductible while you’re traveling, if you keep proper records.
Examples: Costs for transportation… hotels and lodging… tips… meals… laundry and dry cleaning… baggage handling… trip insurance and other related costs.
For starters: An employee who is fully reimbursed for business travel expenses by his/her employer does not need to account for these payments on his tax return. However, if you receive an expense allowance for which you don’t need to account to your employer, the amounts paid must be reported to you on your W-2 wage statement as income. You then can claim your business travel expenses on your tax return on Schedule A as a miscellaneous deduction. The total of your miscellaneous deductions is deductible to the extent that it exceeds 2% of your adjusted gross income.
Here are some travel tax-savers…
Loophole: You do not need receipts for the IRS for expenses of $75 or less if the expenses are properly recorded in a business diary contemporaneous with the activity.
Required information: Business purpose… time… place and date… names of people involved… what was purchased… how much was paid.
Exception: A receipt is required for lodging costing any amount.
Loophole: For out-of-town travel (or outside the country), ask your employer to give you the standard IRS meal allowance rather than to reimburse your actual expenses.
These amounts are not taxable income even if you spend less than the full allowance — so, if you keep your meal expenses low, you’ll actually be earning extra tax-free income. The rates, which are set by the IRS, vary by area. Domestic travel per diem rates are listed in IRS Publication 1542, Per Diem Rates, available online from www.irs.gov. Foreign travel per diem rates are available from www.gsa.gov.
Note: Cruise ship travel deductions are limited to twice the domestic per diem rate.
Loophole: Consider attending a business conference on a cruise ship.
You can deduct up to $2,000 annually for such conferences if all the ports are in the US and the ship is registered in the US — the per diem rules (see above) do not apply to conferences. Strict tax reporting requirements apply, so check with your tax adviser before embarking.
Loophole: Out-of-town “commuting” costs are fully deductible.
While commuting costs generally are not deductible, business travelers can deduct such expenses (including car rental, cab fare, limo, and mass transit) as the cost of “commuting” from a hotel to their place of business.
Loophole: Consider establishing an official “tax home” if you regularly travel to work in multiple locations.
Your tax home is the location of your principal place of business. Without one, you cannot deduct any travel and meal costs.
Note: A “tax home” cannot be merely a mailing address or the local library or Starbucks — it must be a legitimate location where you conduct business.
Loophole: Even if you work at a temporary business location for many months, if the period is less than a year, all travel and lodging costs are deducted by the business and not taxed to the employee.
After one year, the government considers this a “permanent” business location and travel costs are not deductible… or alternatively, they are deducted by the business and taxed to the employee.
Loophole: Married couples who work in different cities during the workweek can maintain separate “tax homes” for travel deduction purposes.
However, once the one-year threshold is exceeded, even legitimate expenses are not deductible.
Loophole: Meal costs, which generally are not deductible by employees, are fully deductible on trips of at least one overnight stay.
The deduction for meals is limited to 50% of their cost.
Loophole: Domestic business travel combined with some vacation activities is deductible if business is the primary purpose of the travel.
If the primary purpose is vacation, but you do some incidental business, you can deduct the business costs, but not transportation and lodging.
Strategy: Extending a business trip to a weekend to benefit from lower airfares, and using the time for vacation, does not alter the primary business nature of the trip.
Loophole: Business travel outside the US plus vacation activities may be deductible.
The primary purpose of the travel must be for business. And, as opposed to the domestic travel rules, you also must have no control over the purpose or timing of the trip.
Loophole: Expenses of spouses who help entertain business associates on a trip can be fully deducted. The entertainment must be immediately before, during, or after the business meeting or activity. You also must demonstrate that your spouse was helpful to the business relationship.
Loophole: Frequent-flier miles received for business travel but used for personal travel are not taxed.
Exception: Miles that are converted into cash are taxed as compensation.