Making Travel Less Taxing: Introduction

Making Travel Less Taxing: Introduction
Your Tax Home (Away from Home)
Airfare and Transportation
Lodging and Meals
Entertaining Clients
Car Expenses
The Nitty Gritty: Required Receipts and Tax Forms
Ask Scott!


Wait; What Happened to Lucky? 

My name is Scott, and although I do enjoy diet coke and lime and consider myself to be lucky in many ways, I am not in fact your favorite blogger Lucky.  I am a tax attorney and CPA based in Dallas (AA flyer, naturally).  Like many of you, I am obsessed with really enjoy earning and redeeming miles and points for travel adventures.  Last year, I approached Ben about authoring a series of guest posts on taxes and business travel during tax season, and he graciously agreed to provide me a forum.  My hope is that my melding of my professional and personal passions in these weekly posts will be helpful to you all in your tax planning or at least provide some levity to otherwise trivial tax matters.

This initial post will discuss business travel expenses generally; in later weeks, I will highlight specific categories of deductible expenses and conclude with some practical points and a post to answer interesting questions posed by you all along the way.  Please also note the legal disclaimer at the end of this post.

When Is a Travel Expense Deductible? 

A taxpayer may deduct any unreimbursed expense that is ordinary and necessary in carrying on a trade or business activity.  Decades of tax litigation and regulation have given meaning to those few words, but I’ll do my best to distill them down for you.

Unreimbursed

First, the expense must be unreimbursed.  I have more than a twinge of envy toward those of you who are fortunate enough to have all of your travel paid for by a third party as part of your career.  For tax purposes, business travel expenses are generally not deductible unless they are unreimbursed.  Thus, if your employer requires you to submit documentation for all of your travel expenses and then reimburses you based on what the IRS terms an “accountable” plan, then you have no unreimbursed expenses and, as a result, nothing to deduct.  Sorry to be giving you this news, but perhaps all of the miles and points you earn on another’s dime will provide some solace.

For those times when you exceed your company’s reimbursable limits, you will have unreimbursed travel expenses, but as I will discuss in more detail in a future post, unless those amounts exceed 2% of your adjusted gross income and you itemize deductions, you will not receive any actual tax benefit from those costs.  So, if you have to exceed your corporate kitty limits, do so for the fun (and extra points charged to your favorite card) but don’t count on a tax benefit.

Ordinary and Necessary

Expenses that are “ordinary and necessary in carrying on a trade or business activity” are in some cases quite obvious:

  • Warm nuts served to your customers in first class?  Yup, deductible.
  • Costs paid to consultants to integrate two companies following a merger?  No argument from the IRS there (at least as to deductibility…I’ll leave the evaluation of the smoothness of such integrations to others).
  • Costs incurred by a sales rep for out of town travel?  Or, how about that business trip to ___________ where a few extra days are tacked on to the itinerary for a mini-vacation?  Hmmmm.  Let’s discuss!

Potentially deductible unreimbursed travel expenses for such a sales rep traveling away from home on business include those incurred for airfare, lodging, meals, taxis, buses, baggage fees, rental cars, the use of a personal car, telephone expenses, and even dry cleaning, among others.  In future posts, I’ll explain the requirements and practicalities of deducting these specific expenses.  I’ll also discuss how to allocate costs when a trip is part business and part personal.

Initially, though, let’s consider the threshold question of whether travel expenses are business related or not.  For better or worse, U.S. tax law is loath to allow taxpayers to deduct personal expenses; in short, Uncle Same doesn’t want to allow you to deduct the cost of your personal home, food or clothing.  These items are considered non-business related, no matter how serious you take them.

What makes travel expenses unique from more cut-and-dried business expenses like supplies or salaries is that there is often a business and personal element to travel.  And, when incurred in combination with a business activity, your otherwise nondeductible expenses for items such as lodging and meals may become deductible simply because you incurred those expenses while away from home.  (Yes, a meal bought for a client may be deductible regardless of whether you’re away from home, but for purposes of this discussion, let’s consider only your meal, not that of your client).

So, the definition of “away from home” becomes quite important since your ability to deduct travel expenses and realize tax savings hinges on whether you’re away from home for tax purposes.  And, of course, the IRS has their own rules for determining your tax home that are at times less than intuitive…more on that next time.

Conclusion and Next Time

Thus, unreimbursed travel expenses that are ordinary and necessary to your business will not only earn you miles and points for those charged expenses but also may reduce your tax liability.  In my next post, I’ll discuss the IRS’s definition of your “tax home.”  Until then, feel free to leave questions in the comments! Also, you may follow me on Twitter @ScottTaxLaw or learn more about my legal and CPA practice.

Disclaimer:  While I hope the information I provide will be helpful (and hopefully even humorous at times), none of this information should be construed as offering legal advice or creating an attorney-client relationship between the reader and my law firm.  You should not act or refrain from acting based on this advice and should consult your own attorney or CPA regarding your specific tax matters.  IRS Circular 230 Notice:  Nothing in these communication is intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Comments

  1. Scott, nice to have you here.

    Say you are “Lucky” enough to be a full time travel blogger. You travel around the world and post about your experiences. You make money from your blog. Would you be able to deduct all your travel expenses, including airfare, hotel, food, etc?

  2. A question for the guest writer:
    Say you’re self-employed, took on business expenses for a company that were later included on your freelancer invoice and were reimbursed by the company.
    The company later sends you a 1099 in January that includes all that reimbursement pay. You need to report all that income that’s on the 1099, and you’ll be taxed on it, so you need to also deduct those expenses on your return to even it out. Correct?

  3. Scott, question for those of us in states where we can deduct sales taxes (like Lucky here in WA)…

    When you buy gasoline here, there’s no sales tax listed on the receipts, but there is a 37.5 cent sales tax per gallon of gasoline sold in the state. Can I calculate how much of my gasoline spend was tax and include that in my sales tax deduction calculation? If you drive 12K miles/yr at 20 miles/gallon, that would add up to $225 in sales tax.

    Thanks!

  4. Scott – how in the world are you? I had no idea you were a travel nut too…its been a while since the Baylor days…

  5. @John From Lucky’s post yesterday (2/11), he states in part “…there’s no money changing hands with these posts — I’m not paying him to write them, and he’s not paying for me to feature them on the blog.”

  6. Hi Scott! Thanks for putting together this column. I just started a travel blog where I write about my personal vacations. It’s a hobby for now, but I’m thinking of monetizing it at some point in the distant future. If I did monetize, and the blog were a side-business, which travel expenses could I deduct from the cost of the business? I would continue writing about my personal vacations. Not sure if this question falls with the scope your column, apologies if it doesn’t. Thanks!

  7. I was planning to ask essentially the same question as @Brazilflyer, but with an extra twist. I worked for two different companies as a consultant. One included the total amount of my travel reimbursements in the 1099 they sent me (and I deducted the amount on my Schedule C). The other did not include any of the amount they reimbursed me on the 1099 (which to me makes sense since all the reimbursement should be deductible). But which company do you think was “correct” from an IRS viewpoint?

  8. @Ken – anyone “lucky” enough to be in that situation certainly would have some unreimbursed expenses that would be “ordinary and necessary” to carry on their business. As to whether “all” of the expenses would be deductible, stay tuned for future posts.

    @Brazilflyer – you’re smart to realize the importance of 1099 matching. To the IRS (much like airline award reservation desks), the computer is always right. Thus, it’s a good idea to report as your top line income what’s on the 1099, then deduct the expenses that you incurred to get to your net income for your business.

  9. @Bruce – For those like you (and me!) living in states with no state income tax, the state and local sales tax deduction does become an important deduction. Unfortunately, gasoline taxes, even the the state and local portion, are specifically excluded from that deduction.

    @John – what jmd001 said…I’m not getting paid as Ben mentioned yesterday.

    @TravelBug, any expenses you incur that are ordinary and necessary to your business are deductible, and I’ll try to provide guidance in future posts as to how to divide up the personal and business components when a trip contains both. Congrats on your new blog!

  10. @jmd001 – Either approach *can be* correct according to the IRS. The reason for handling those amounts differently likely rests with how the companies paying you run their own accounting systems. In the first case, they are probably deducting all of the costs you billed them for as “contractor” expense and lumping in everything they paid you for in that one category.

    In the second case, the company is likely categorizing the amounts reimbursed to you as expenses for the underlying amounts (for example, shipping costs if they reimbursed you for a FedEx) and only showing the net amount paid to you on the 1099 since on their accounting ledgers, that’s the only amount for “contractors.”

  11. Thanks to Scott for answering my question. This is gonna be a great series for most of us, I think, as many face tax questions regarding biz expenses.

  12. @Travel Bug – please send me a direct message on Twitter, and I’ll point you in the right direction.

    @Brazilflyer – Thanks! That’s the goal.

  13. Cool post! I’m a tax attorney too, but in exempt organizations…so personal income tax is still pretty foreign to me.

  14. @Lively – Good point. I was not planning covering the threshold question of “what is a business” in this series, but it’s certainly worth noting for anyone who is thinking of starting a “business” that is in reality a hobby. Perhaps that will be a good issue to address in the last post.

  15. This is great, thanks Scott for a great piece. I am sad and embarrassed to admit I find this tax stuff fascinating. I come from the UK where the tax system is extremely simple, and here in the US it’s this vastly complex system that is so ripe for abuse – er, I mean, er… anyway…

    I do have one question, which may be for a later post but it does come under the general concept of unreimbursed expenses. Our company policy only allows us a certain amount to spend on flights which in practice means travelling to Europe means flying coach. But I am allergic to this “coach” product so instead what I do is use miles and then get the taxes reimbursed. My question is can I then a claim a deduction for the value of the miles I used to acquire the ticket. And if so, how do I value them? (My thought would be at replacement cost, so how much it would cost me to buy them from the particular issuer)

  16. Look fwd to the rest of the rest of the series- always interested in learning more about taxes and business expenses.

    -Someone pursuing the CPA

  17. So if I fly back to AZ where I have a rental house in a LLC I can deduct part or all of my expenses ( air, hotel, food)?

  18. Scott – re deduction of un-reimbursed business expenses (for W-2 wage-earners, not Schedule C sole proprietors) – note that, in addition to the “2% of adjusted gross income” threshold, these expenses are not deductible for Alternative Minimum Tax (AMT) purposes. (Yes, I live in California, where way more of us than the 4% national average are subject to AMT 🙂 .)

  19. @Raffles LOL I like your wishful thinking, but as a UK resident you’ll be stuck with the much less generous HMRC rules than the IRS ones – we don’t get to make nearly as many deductions as our American friends! I guess setting up a limited company to do all your blogging would be a potential way of charging business costs, but I don’t think they’ll let you just make US-style deductions!

  20. @UAPhil – Good point. Yes, a higher than average number of residents of both CA and NY (and other high state income tax states) get hit with the AMT. What you didn’t say is whether you think all that sunshine is worth the extra taxes you pay. 🙂

  21. Would be interested in learning more about multi-state tax withholding.

    Also would purchase of carry on bag be considered a deductible travel expense?

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