Understanding Business Travel Expenses and Tax Deductions
The TCJA changes how to treat business travel expenses when filing taxes
Entrepreneurs have plenty to manage, from growing their business to paying employees to managing client and vendor relationships. Paying taxes is a big consideration and can be complex, especially when the tax law continues to change and thus requirements are hard to follow.
The Tax Cuts and Jobs Act (TCJA) made some major changes to tax requirements for businesses and the self-employed, including what are considered deductible business travel expenses. What follows is a look at the basics you need to know for deducting business travel costs.
Business travel tax basics
It’s first important to understand what the IRS deems business travel. You cannot claim deductions under this category if the expenses were incurred in your tax home, or the location of your main place of business. (This can be different than your place of residence or family home.) The IRS says that the most important consideration for figuring out your main tax home for business is the length of time you spend in each location.
For instance, if you are on a temporary work assignment and need to travel, related expenses are deductible. However, if your work assignment is indefinite, they are not deductible.
The IRS outlines common applicable business travel expenses:
- Transportation, including airplane, train, bus, car, and taxi costs
- Shipments between your work location and a temporary location, such as baggage or display materials
- Car expenses while you’re at your temporary work location
- Meals and hotel/lodging expenses (but see the next section)
- Expenses related to laundry, including dry cleaning
- Communications while you are away, including business calls
- Tips/gratuity for these services
Personal activities that a worker may take on a trip are not deductible—only those related to business. And if a spouse or dependent travel with the taxpayer, his or her travel expenses are generally nondeductible, unless certain conditions are met, such as that he or she is the employee of the taxpayer.
Self-employed workers can deduct travel expenses on Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship) or Form 1040, Schedule C-EZ, Net Profit from Business (Sole Proprietorship). Unlike other employees claiming business expenses, self-employed taxpayers don’t have to meet the requirement that expenses must exceed two percent of their adjusted gross income.
Taxpayers can use per diems to calculate business travel costs. These allowances are provided for reasonable daily expenses and rates are set for both U.S. and overseas travel. Because the rates are different for different locations, the government has the current per diem rates available online by state and city, if applicable.
TCJA changes to travel expenses
The TCJA made some significant changes to what you can claim for business expenses. Meals while traveling are now subject to a limitation of 50 percent, meaning that only half of the cost of applicable business-related meals can be deducted. But employers can still reimburse employees for the full cost of their meals.
Before 2018, business travel expenses could also include entertainment expenses with the 50 percent limitation, but the TCJA eliminated the deduction for entertainment, amusement, or recreation expenses beginning in the 2018 tax year. Any food or drinks that are had during entertainment activities are not considered entertainment if they were purchased separately from the entertainment event, according to the IRS guidelines.
Cruise chip business expenses may still be deductible if an employee attends conventions, seminars, or similar events that are held on cruise ships. Taxpayers can deduct a maximum of $2,000 per year, and only if:
- The event is directly related to the taxpayer’s business or trade
- The ship is registered in the U.S.
- All of the ship’s ports are in the U.S.
- The taxpayer attaches to their tax return a signed, written statement that includes information about the trip, such as total days, number of hours each day spent in business activities and a program of activities
- The taxpayer attaches a signed, written statement from an officer of the organization that sponsored the meeting or event that includes a schedule of business activities and the number of hours the taxpayer attended the activities
Because tax law is not something to treat lightly, it’s a good idea to talk through these matters with a tax professional. Provident CPA & Business Advisors can provide you and your business a variety of tax and financial services, so contact our team of professionals today. We can walk you through tax season so you can rest assured that you are following all applicable laws and paying the least amount of tax legally possible.