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Understanding Business Travel Expenses and Tax Deductions

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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.

Per diems

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.

The TCJA is in Full Effect: How Physicians Can Keep More Money

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The new tax law made it easier for many doctors to pay less, but not everyone will benefit. From charity to children, here are the decisions which could affect how much income doctors retain in 2019

Doctors are frequently exhausted by their duties and find focusing on their taxes difficult – and MD Magazine highlighted just how vulnerable physicians can be when it comes to paying out come April: “Experience shows that most doctors overpay in taxes and sometimes pay in excess of $125 for every $100 they were required to pay according to the law.” Poor choices and lack of information may cost thousands of dollars in potential tax savings under the current law.

The law in question is the Tax Cuts and Jobs Act (TCJA) of 2017. It does have its critics but for the most part, the TCJA was welcomed by the majority who would pay less in taxes. Doctors are part of that crowd but on closer inspection, the TCJA wasn’t a windfall for every physician.

For example:- doctors in the highest tax states such as New York or California lost their state income tax deductions. This was a result of the State and Local Tax deductions being limited to $10,000 for joint filers. Physicians with the “wrong” zip code ended up with an increase in tax bills.

This is important since our two example states top the national rankings for the most physicians employed in America, according to the Bureau of Labor Statistics. And beyond those areas, an even greater number of physicians could benefit from sharpening their tax awareness in 2019.

Consider how much you earn vs. how you make it

The 1099 tax bracket of locum tenens trumps a W2 wage. Since W2 earnings are the highest taxed of the two, it may be in your best interests to become a free agent (this needn’t be a total career shift since you may be able to form a small business while serving with a primary employer).

There are other advantages of going your own way can bring. You may be eligible for an income pass-through deduction if your total taxable income is less than $207,500 or $415,000 if married, which could qualify you to receive a tax deduction of up to 20 percent of your business income.

You will also be able to capitalize on tax-deductibles for work; a long list that could save you plenty. Some self-employed physicians choose to employ their family members in their practice. This decision can also go some way to saving on income tax, especially if the employees are children.

Tax strategy for homeowners

Doctors may want to think twice before refinancing in 2019. The TCJA impacts deductions on mortgages obtained after Jan. 1, 2018, meaning only the interest on the first $750,000 of debt is deductible. Owning your home does offer other perks which can save on taxes, however.

Advanced tax strategy can leverage U.S. Tax Code Section 280A(g) and let you rent out all or part of your home, tax-free, for two weeks every year. The same rule allows physicians to partially or wholly rent out their property to their business, allowing for tax-free income and a business tax deduction.

How the TCJA impacts saving for children

Doctors who’ve opened a custodial account for their children as either a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) will lose out on tax. This defeats the original bonuses of such accounts. Parents who chose these would sidestep the attorney fees associated with establishing a trust, while the assets passed to the child enjoyed the lower tax rate for minors.

Opening a 529 that ensures that funds go toward your child’s future education could be a suitable alternative. It’s tax-free at the federal and state level and tax-deferred as it grows. The contributions themselves aren’t deductible, but any expenditures for qualifying educational purposes are (up to $10,000 a year for attendance, tuition, or enrollment).

How to maximize charitable donations

The standard charitable deduction is currently $24,000 for married physicians. You’re best advised not to make regular donations of smaller amounts to your favorite cause; rather, one large donation with a break in-between. Another option is donating securities from a taxable account. There’s no capital gain on the sale and the gift is tax deductible.

Your individual needs affect your strategy

You can generally assess the TCJA’s impact by using this tax calculator from the Tax Foundation which allows you to create a custom scenario to see how tax reform will affect you or your family. Mortgage, Trust, and 529 options have pros and cons dependent upon your present circumstances and future goals. This is what makes speaking to a qualified tax advisor so important.

Tax law is notoriously dense and it’s subject to changes that many individuals don’t always know about. A qualified CPA will always be abreast of revisions and use this knowledge to save you every penny they can.

Provident CPA and Business Advisors offer a wide range of services in tax planning, accounting, and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.