In Part One of our Travel Deduction series, we discussed the four tests travel must pass to be deductible by a sole proprietor. Part Two: Maximizing Business Days shared the IRS definition of a business day and the importance of making sure over half of your destination days meet this definition. In this article, we'll discuss when and what travel costs are deductible. Although written with real estate agents in mind, the same rules apply to all sole proprietors.
Note Before We Begin: Tax rules are complex and filled with hair-splitting nuance. The information shared in our travel series is my experienced & common-sense interpretation of the IRS phrase, Facts and Circumstances. My goal is to help you maximize your travel deduction while steering clear of IRS scrutiny. This content comes from our Real Estate Agent Tax-Cut Library.
Deducting Travel Costs
Deducting travel expenses is relatively easy when you travel alone to and from your business destination, conduct business, and immediately return. Things become much more complicated when non-business travel companions, personal activities, or side-trips get added to the trip. Here are some travel-deduction guidelines:
More than Half Days for Business: Greater than 50% of the days at one's destination must be business days to deduct travel. If half or more are personal days, it is unlikely the trip was primarily for business, meaning it was personal. Travel, lodging, and meals are not deductible - none - zero. A traveler in this predicament can only deduct expenses directly related to business activities such as a seminar or conference fee. For more info, see Maximizing Business Travel Days.
Traveler's Costs Deducted: Only the expenses of the business traveler get deducted. Costs incurred by non-business companions, such as your spouse, significant other, children, or friends, are not deductible.
Expenses of an employee or business associate with you for the same business purpose are deductible. The travel companion must have a bona fide business reason for the trip – it must also be their primary reason for the voyage.
Traveling with Non-Business Folks: When traveling with non-business companions, segregating your cost from theirs is imperative. Paying your fees separately with a business check or business credit card may be a headache, but is an effective way to isolate costs. Handling smaller expenses like meals in such a business-like manner may also steer an auditor away from a more in-depth investigation.
Costs that would be the same regardless of the number of travelers, such as fuel or vehicle mileage, are generally fully deductible. Other outlays may prove problematic, especially those that naturally increase as additional travelers or vacation-perks get added.
For example, Kim takes her husband and four children with her to attend a training conference near Lake Lure in North Carolina. The cost of renting a four-bedroom, lake-front home is $325 per night. Is this a reasonable business expense when a four-star hotel next to the conference center is $145 per night? Probably not. What about the additional cost of renting a three-row SUV versus a mid-sized sedan? If Kim lacks a good business reason for the upgrades, it doesn't mean she can't purchase them. But, she'll be on a lot firmer footing if she only deducts $145 per day for the lake house and the cost of the sedan instead of the SUV.
Costs Must Be Reasonable: As discussed in Part One of our travel series, deductible travel must be reasonable for your business or industry. First-class and luxury hotels are still allowed. Just don't make accommodations so extravagant or over the top, you can't justify them with a plausible business argument (the Smell Test, is discussed in Maximizing Business Days).
Only Business Days Count: Only costs incurred on business days are deductible. Business days are discussed extensively in our Tax-Cut Library and our article, Maximizing Business Days. Expenses paid on personal days do not get deducted, even if the trip is primarily for business.
Transportation: Travel to and from your business destination are deductible as long as the trip meets the guidelines outlined in our article on the Four Business Travel Tests. Transportation includes can be by plane, bus or railway as well as your vehicle (using the actual cost or standard mileage rate). Renting a car for the trip is also acceptable. The key, as with anything tax, is that the mode and cost of transportation be reasonable considering the distance and nature of the trip.
Transportation to business-related activities (including meals on business days) after arriving at your business destination is also deductible. Conveyance can take many forms, including a rental, taxi, public transportation, or ride-sharing programs such as Uber or Lyft.
Transportation on personal days is not deductible, including the cost of a rental vehicle. Neither is travel for non-business purposes, such as a theme park or shopping outlet.
Lodging: Lodging is deducible for business days but not for personal days. A night spent at a hotel during a flight layover or before an early flight is generally acceptable (if reasonable). Overnight stays while traveling by vehicle can also be expensed if you drive far enough to require rest.
Meals: Business-day meals for business travelers are deductible. Meals for non-business travelers are never deductible. Most often, the deduction gets reduced by 50% of the original amount. Travelers can use the actual expenses or a standard allowance for meals and incidentals.
If using the standard allowance, you must apply it to all business trips taken during the year. The daily rates start at $55 per day ($27.50 at 50%), increases for many metropolitan areas, and change regularly. To find the meals allowance for a specific location, visit the GSA's Per Diem Rate Tool. On the site, you will also find per diem rates for lodging and other costs. Self-employed individuals cannot use the lodging rates; only actual lodging costs can be deducted.
The standard meal allowance for travel days (the first and last day of the trip) is limited to 75% of the daily amount. It must also take the 50% deduction-haircut. So, if the full-day deduction is $55 per, the travel-day deduction is only $20.62 ($55 * 75% * 50%).
Here are a few final notes before we move on.
Entertainment Costs: Just because travel qualifies as a business trip doesn't mean movie outings or jet ski rentals are deductible. They are not, even when business associates participate. The Tax Cuts and Jobs Act of 2017 repealed the deduction for business-related entertainment entirely (at least until 2024).
Here are a few scenarios revealing what's deductible based on the number of business & personal days. As mentioned earlier, if you need a business-day review, check out the article Maximizing Business Travel Days.
Scenario One: Monday Travel Day, Tuesday Personal Day, Wednesday and Thursday Business Days, Friday Travel Day.
Because two of your three destination days were business days, the cost of your travel is deductible. Your lodging, meals, and rental vehicle (if purchased) are deductible on Monday, Wednesday and Thursday but NOT Tuesday, because it was a personal day.
Scenario Two: Friday is a travel day, Saturday and Sunday are personal days, Monday and Tuesday are business days, and Wednesday is a travel day.
Only 50% of the destination days are for business, not greater than 50% as required. None of your travel costs, meals, or lodging get deducted. Only costs directly related to business, such as conference or seminar fees, get expensed. Pro Tip: Plan Better!
Scenario Three: Thursday is a travel day, and Friday's a Business Day. Saturday and Sunday are sightseeing days. Monday's a business day, and on Tuesday, you go back home.
Weekends and holidays falling between two business days get counted as business days (see Maximize Business Days for details). In this scenario, all destination days are business days. All travel, lodging, and meals are deductible, even Saturday and Sunday.
Scenario Four: Monday is Travel Day. Tuesday's a Business Day. Wednesday is a beach day. Thursday's all about Business, and Friday is Travel.
Because Wednesday falls between two business days, it is called a sandwich day (see Maximize Business Days). It's a business day as well. All destination days are business days. All of the business traveler's costs are deductible.
This is part 3 of our four-part article series on Deducting Domestic Travel. Continue reading part four, Deducting Domestic Travel Part Four: Substantiating Business Travel Deduction.
Summary and Invite: We hope this article answers some of your questions about when and what business travel expenses are deductible. If you'd like some assistance in cutting a Real Estate Agent's highest cost - taxes, please download our Real Estate Agent Tax Organizer. We also invite you will review and purchase our Real Estate Agent Tax-Cut Library - over eight hours of tax-cut training broken into twenty-nine searchable volumes. It covers every possible deduction a Real Estate Agent can take on their business tax return. Our Broker Version helps entire agencies cut their taxes! And don't forget to browse our courses. You might find something you like!
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
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