The Self-Employed Worker's Guide to The Business Travel Tax Deduction
Like business meals and the home office deduction, many freelancers, contractors, and the self-employed forget to claim business travel tax write-offs. You don’t have to fly first class and stay at a fancy hotel to claim travel expense tax deductions. Conferences, worksite visits, and even a change of scenery can (sometimes) qualify as business travel.
Travel tax deductions have been available to businesses and self-employed individuals for quite some time. Over the past few tax years, primarily due to the Tax Cuts and Jobs Act (TCJA), there have been some changes to what you can write off, where it is reported when you file taxes, and how much of a benefit you receive. Before looking at specific deductible business expenses, it is critical to understand what is considered “travel” and if you meet the additional IRS guidelines regarding business and travel expenses.
What Is Your “Tax Home”?
A taxpayer can deduct travel expenses anytime you are traveling away from home but depending on where you work the IRS definition of “home” can get complicated. Your home is not necessarily where you and/or your family lives. To determine what is considered travel expenses, you first need to define your “tax home”.
There are two things to consider when defining your tax home.
What Is Your Main Place of Business?
A travel tax deduction is a bit different than claiming a home office deduction. When determining your main place of business, the Internal Revenue Services states you should consider the following:
- The length of time you normally need to spend at each location for business purposes.
- The degree of business activity in each area.
- The relative significance of financial return from each out.
Of the three, the most important to consider is the length of time spent at each location.
If you are self-employed and work from home, then the answer to “main place of business” is obvious because it is your actual home or as the IRS refers to it “your family home”. This can make it difficult to think of situations where your family home is not also your tax home.
The most common reason your tax home will not be your family home is when you travel more than you are at your family home. The example provided by the IRS is essentially –
- If you live with your family in Chicago BUT...
- Work in Milwaukee during the week (where you stay in hotels and eat in restaurants)
Then your tax home is Milwaukee because that is where you spend most of your work time – even if you travel back to your family home every weekend.
How Large is Your Tax Home?
In most cases, your tax home is the entire city or general area where your main place of business or work is located. The “entire city” is easy to define but “general area” gets a bit tricker. For example, if you live in a rural area then your general area may span several counties during a regular work week. If you have any questions about what your tax home is, consulting an Enrolled Agent or CPA is advisable because defining your tax home has a direct impact on you travel tax deductions.
Other Restrictions on Travel Tax Deductions
Once you have defined your tax home, the next step is making sure your expenses qualify as business related travel expenses.
- Your trip must be mostly business.
The IRS will measure your time away in days. This means if you spend more days doing business activities or not, it is considered an eligible travel expense. Additionally, your travel days are counted as work days.
If you are traveling for personal reason but still conduct business, there could be a tax deduction. For example, if you are on vacation in a city where you have a client and you take the client out to lunch, you can deduct the standard 50% cost of the meal because it directly ties to your business.
- Your trip must be an ordinary and necessary expense.
The IRS uses the term “Ordinary and Necessary” frequently when discussing business travel expenses. As a result, they have provided additional guidance on what this phrase means. Ordinary means, given the industry you are in, the expense is not extraneous. Necessary means the expenses was incurred for the sake of carrying out business activities. For example, if there are two conferences available to you, one in your hometown and one in another state, you cannot take a trip and consider it necessary.
- Traveling Abroad
Interesting, if you are traveling abroad for business purposes the restrictions actually relax. You only need to spend 25% of your time on business-related activities for the bulk of your travel to be considered business. If you spend less than 25% of your time on business-related activities, you can still deduct your travel costs on a proportional basis.
Rules For Business Travel
The IRS stipulates a few simple guidelines to determine whether a trip is for business.
- Your destination should be far -- at least 100 miles from home. That’s about a two hour drive, or any kind of plane ride. The trip should require you to rest or sleep somewhere that isn’t your home.
- You should be working regular hours while on the trip. In general, that means 8 hours a day of work-related activity. It’s fine to take personal time in the evenings and you can still take off weekends, but you can’t take a half-hour call from Disneyland and call it a business trip.
- The trip should last less than a year. Once you’ve been somewhere for over a year, you’re essentially living there. If your work is seasonal, traveling for six months at a time is fine, though!
For example, let’s say you’re a real estate agent living in Chicago. You travel to an industry conference in Las Vegas. You attend the conference during the day, go out in the evenings, and then stay the weekend. That’s a business trip! The flight, meals, hotel, and WiFi expenses are all tax write-offs!
Another example: you’re a freelancer on Upwork, living in Seattle. You move down to live with your sister in San Diego for the winter to expand your client network and work regular hours while you’re there. Flights, meals, sublet expenses, and shipping expenses are all tax deductible.
You can use our free 1099 template to track your deductions or sign up for our app.
Quick List of Tax Deductible Expenses
As a rule of thumb, all travel-related expenses while on a business trip are tax deductible. You can also claim meals while traveling, but be careful with entertainment expenses (like going out for drinks!). Here are some common types of write-offs you should use a travel expense tracker to record.
🛫 All transportation
Any transportation costs are a travel tax deduction. This includes traveling by airplane, train, bus, or car to and from your tax home to the business destination. It is important to point out that if you are provided with airfare by the person/company you are meeting or if you use frequent traveler miles then this is not deductible because your cost is $0. Baggage fees are deductible as well.
If you rent a car to go on a business trip, the car rental is a qualified business expense and will be tax deductible. If you drive your own vehicle you can take actual costs or use the IRS standard mileage deductive. If you choose to take the actual costs then your business-related actual costs for the entire year should be recorded. You cannot take the actual cost for some business purposes and the standard mileage deductive for others.
Flights, train, and car rental expenses all count as tax write offs. Don’t forget the Uber ride from the airport and back!
Hotels, motels, airbnb stays, sublets on craigslist, or even reimbursing a friend for sleeping on their couch are all tax deductible lodging expenses.
🥡 Meals while traveling
You can only deduct a portion of your business meals and entertainment expenses, even if your trip is entirely for business purposes. Additionally, the expenses need to specifically facilitate business. The overall deduction for qualifying expenses is 50%. This means that during a random “night off” you cannot deduct the cost of meals. However, grabbing a burger alone at your airport terminal counts! Even groceries and takeout are tax deductible.
Airplane wifi, hotel wifi, and so on is completely deductible when you’re traveling for work. This also includes other communication expenses like hotspots and international calls.
If you need to ship things as part of your trip, such as conference booth materials or simply extra clothes, those expenses are also tax deductible.
👔 Dry cleaning
If you have to look your best on the trip, related expenses are tax deductible. That necessity includes washing and cleaning charges.
A List of Common Items You Cannot Deduct
The Cost of Bringing a Spouse/Child on a Business Trip
If you bring your spouse or child on a business trip, your travel expense deductions get a little trickier. In general, the cost of bring other people on a business trip is considered personal expense which means it is not deductible. You can deduct travel expenses if your spouse/child:
- Is an employee.
- Has a bona fide business purpose for traveling with you.
- They would otherwise be allowed to deduct the travel expense.
Some Hotel Bill Charges
Staying in a hotel may be required for travel purposes so the room charge, and taxes are deductible; however there are additional charges which may not be tax deductible. For example, gym/fitness center fees, fees for movies, and fees for games are not deductible.
Dry cleaning at a hotel is often not tax deductible unless your clothing is work-related. Work-related clothing means it is clothing you cannot wear outside of work - such as a company uniform.
Business Travel with Your Own Vehicle
There are two ways to deduct business travel if you are using your own vehicle.
Using the “actual expenses” method you will track and total your actual costs associated with using your vehicle. Common costs include:
- Parking Fees
You then take your total vehicle expenses for the year and multiply it by the percentage of time you used it for business.
The standard mileage method is simpler than the actual expenses method. You keep track of the miles you drove for business purposes and then claim the standard mileage rate deduction.
Where to Claim Travel Expenses When Filing Your Taxes
If you are self-employed, you will claim all your income tax deduction on the Schedule C. This is part of the Form 1040 that is completed every year for self-employed individuals. If you work with a tax professional they will know how to claim these deductions, how to complete the Schedule C, and what documentation you should retain in the event you need to prove your expenses.
What Happens If Your Business Deductions Are Disallowed?
If the Internal Revenue Service challenges your business deduction and they are disallowed there are potential penalties. This is true regardless of whether the deduction should not have been claimed on your original tax return or if it was a legitimate deduction, but you no longer have the necessary documentation to support it.
What is the Penalty?
The penalty is normally 20% of the difference between what you should have paid and what you actually paid. You also have to make up the original difference. In total, this means you will be paying 120% of your original tax obligation (your original obligation + 20% penalty).
When Does This Penalty Come Into Play?
The 20% penalty is not automatic. It only applies if it allowed you to pay substantially less taxes than you normally would. In most cases, the IRS considers “substantially less” to mean a 10% difference between what you should have paid and what you actually paid. When looking at the travel tax deductions, it would take a significant number of deductions to be disqualified by the IRS to meet the 10% threshold.
What about digital nomads?
With the rise of remote-first workplaces, many freelancers choose to take their work with them as they travel the globe. As long as you have some work-related reason for why the travel helps with your contracting or freelancing work, then this excursion counts as business travel. Plausible reasons include meeting with local clients or attending a local conference and then extending your stay.
However, if you’re a remote freelance software developer working from Thailand because you like the weather, that’s not business travel, sorry to say.
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