What Makes Travel Expenses Tax Deductible?
Here’s a little pop quiz. Which of these trips are tax deductible?
Flying to Vancouver for a 3-day conference, then tacking on a side trip to Whistler for the weekend.
Temporarily moving to another state for work.
Traveling around the U.S. in your pickup truck while working as a freelance photographer.
If you answered “all of the above,” you’d be incorrect. Some of these trips contain tax deductible travel expenses, and others don’t. In this post, I’ll try to explain the differences.
Where’s Your Tax Home?
The tax deductibility of travel expenses basically hinges upon the location of your tax home, and the overnight rule or “rest requirement.”
Your tax home is generally either: a) your regular place of business, regardless of where your family home is located; or b) if you have more than one place of business, it’s the place where you earn the most money or spend the most time. It includes the entire city or general area where business is conducted.
The overnight rule specifies that you must be away from your tax home longer than an ordinary work day, and long enough that you cannot reasonably be expected to complete the trip without sleep or rest at a bona fide lodging place. (A quick nap at a rest stop doesn’t count.)
Expenses for transportation, meals, and lodging are tax deductible for overnight business travel away from the tax home.
Here are three examples:
Sarah is a ski instructor who works in Colorado during the winter months, then returns home to North Carolina to work as a freelance web designer during the rest of the year. She earns $20,000 in CO and $40,000 in NC. Because she earns more money in NC and spends more time there, Sarah’s tax home is NC. She may deduct her ordinary and necessary travel expenses to and from Colorado.
David is a truck driver who lives in Nashville, and is employed by a trucking company with its main terminal in Memphis. At the end of long runs, David spends one night near the terminal in Memphis before driving home to Nashville. David’s main place of business and tax home is Memphis. Travel costs between his tax home and his personal home are non-deductible personal commuting expenses.
Josh is a young “digital nomad.” He lives full-time in his camper van while working as a freelance photographer for various outdoor magazines. Whether he’s in Glacier National Park or the Kenai Peninsula, each work location becomes his tax home. He is considered an “itinerant,” and as such, cannot claim travel expense deductions because he is never considered to be traveling away from his tax home.
Temporary vs Indefinite Jobs
Generally, a temporary job in a single location is one that is realistically expected to last (and does in fact last) for one year or less. If the job away from your main place of work is temporary, your tax home doesn’t change. You’re considered to be away from your tax home for the whole period you’re away from your main place of work, and may deduct travel expenses — like Sarah the ski instructor above.
However, if the job is indefinite, the new job location becomes your new tax home, and you cannot deduct travel expenses while there. Work is considered indefinite if it’s realistically expected to last for more than one year, whether or not it actually lasts for more than one year. (However, you may be able to deduct the cost of relocating to your new tax home as a moving expense.)
It’s important to note that the taxpayer must determine whether the new job is temporary or indefinite right at the beginning, when work is begun.
Travel Expenses — Business vs. Personal
Clients often get confused by “mixed trips,” in which some portion of the travel costs are for personal reasons. There’s also the matter of business travel outside the United States, the deductibility of which is sometimes limited. Though more information can be gleaned from IRS Pub. 463, here’s a broad overview.
TRIPS PRIMARILY FOR BUSINESS REASONS (IN THE U.S)
If a trip is entirely business related, then all travel expenses are tax deductible.
If a trip is primarily for business and, while at the destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct only the business portion of your travel expenses. These expenses include the travel costs of getting to and from your business destination and any business-related expenses while there.
It’s important to note that the amount of time spent on business activities compared to the amount of time spent on personal activities is an important factor is determining whether the trip is primarily business or personal. (Reg. § 1.162-2)
TRIPS PRIMARILY FOR PERSONAL REASONS
If a trip is primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense.
Note that the scheduling of incidental business activities during a trip, such as writing emails or attending lectures, will not likely change what is really a vacation into a business trip in the eyes of the IRS.
TRAVEL OUTSIDE THE U.S.
If a trip outside the United States is entirely for business purposes, then all travel expenses are tax deductible.
Even if you didn’t spend the whole time on business activities, your trip is considered entirely for business if you meet at least one of the following four criteria:
You did not have substantial control over arranging it. (Note: This pretty much never applies to self-employed people.)
You were outside the U.S. for a week or less, combining business and non-business activities. (Also known as the “one week loophole.”)
You were outside the U.S. for more than a week, and you spent less than 25% of that time on non-business activities.
You can establish that a personal vacation was not a major consideration, even if you have substantial control over arranging the trip.
To answer my earlier pop-quiz question: What’s tax deductible when flying to Vancouver for a 3-day conference, then tacking on an extra weekend in Whistler?
The whole thing, since it’s less than a week!
But for trips longer than a week, you must do a little math and allocate travel time on a day-to-day basis between business days and non-business days.
Keep Good Records!
The importance of business expense substantiation cannot be overstated, especially in the area of travel, meals, and entertainment. You should carefully document these expenses in order to prove the legitimacy of the associated tax deductions.
Don’t forget to write the actual business purpose of the expense on the receipt, ie. “Met with Dan Smith to review branding concept.”