When individuals travel for business, there are several factors to consider about the tax consequences. These are therefore ideal cases for the expertise of an enrolled agent tax preparer. Sometimes the traveler is a business owner and other times an employee is traveling without being fully reimbursed for all out-of-pocket costs.
The first critical tax matter is understanding what travel expenses are tax-deductible. As a general rule covered in enrolled agent study, anything that is a necessary cost for the business trip is a potential tax deduction. This includes any expense for traveling away from home on an overnight stay.
Typical tax-deductible expenses include transportation, lodging and meals while traveling for business. Transportation includes taxi fares and rental car fees at the business destination. Enrolled agent classes teach that the deduction for meals is limited to 50 percent of the total cost. This same limitation applies to entertainment expenses for clients, customers and employees – as long as the expenditure is directly related or associated with a clear business purpose.
Sole proprietors and independent contractors deduct these costs as business expenses. The guidelines contained in enrolled agent study materials show that employees not reimbursed for travel expenses deduct them as miscellaneous itemized deductions. This results in a tax-deductible amount only for the part of expenses exceeding 2 percent of adjusted gross income.
A big part of enrolled agent work in helping taxpayers with deduction of travel expenses involves situations where a business trip is mixed with vacation time. There are some specific tax rules to follow in these cases.
First, in order to deduct travel costs, the primary purpose of the trip must embody a business purpose. Doing only some work while on vacation means that only expenses directly related to business are tax-deductible. These are costs that would have been incurred when not traveling, such as a business meal with a customer.
As long as the trip is primarily for business, transportation expense to the destination and back home is tax-deductible. The deductible percentage is based upon the number of business days in the trip relative to the total days. This same percentage is applied to all expenses on a trip that combines business and leisure days.
No tax deduction is available for the cost for a family member as a travel companion. In fact, any extra cost for accommodations of a family member is not deductible. Therefore, a nightly room rate for the one business traveler is the only deductible amount for lodging.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.