Maximize Your Tax Deductions by Using A Travel Expenses Tracker
Did you know most freelancers overlook travel expenses when it comes to filing taxes? No, you don't have to be a big CEO of a corporation to write-off those travel expenses. If you're frequently on the go for work, and it involves trains, planes, or staying overnight away from home, then you have some deductions waiting to be claimed.
While you won't be able to deduct an entire vacation, there are plenty of opportunities for tax relief. You can use that hard-earned money on something more fun…like a vacation.
One warning, though: business travel expenses are a common trigger for IRS audits. You must keep accurate records and follow guidelines. You won't get away with saying, "I didn't know."
In this article, we'll go over why you should use a travel expense tracker for your next trip.
Let's go over the basic rules of the travel game:
Any business-related trip that requires you to travel over 100 miles and sleep somewhere other than your home. A day trip doesn't fit the requirements for "business travel expenses." You have to be far enough away from the home address you claim on your taxes that you are required to find lodging.
2. Business focused
This may seem obvious, but the trip has to be primarily for business purposes. Going on a beach trip for four days and meeting a client for dinner one night won't quite cut it. That's what we call a vacation. That being said, you may be able to write-off that one dinner for just you and your client (not your entire family, though).
3. Ordinary and Necessary expenses only
An overnight trip means a hotel expense is a given. What's not is booking a room at a high dollar resort. The same goes for dinner. A $200 bottle of the finest wine will definitely raise some eyebrows at the IRS. If in doubt, ask a tax professional ahead of time.
Are you scratching your head, wondering what expenses you need to keep track of at this point? It's not as complicated as it may sound. Here are some typical travel expenses:
- Travel expenses: train, plane, bus or rental car costs are 100% deductible.
- If you use your car, you can claim either the trip's mileage or the "actual cost method." For the second option, you must calculate the cost of gas, insurance, and other related expenses specific to each trip. The latter method is usually not as beneficial and more complicated.
- Hotel expenses: Keeping rule #3 in mind, your hotel expenses are 100% deductible, as well. Of course, this doesn't include renting movies or excessive room service.
- Meals: Your meals while away on a business trip are deductible, although only 50% is eligible.
- Miscellaneous expenses: examples include dry cleaning, business calls, tips, and baggage fees are also typically deductible.
Traveling is expensive, and a small business owner needs every tax break available to lighten the load. The key is keeping detailed, accurate records of each expense. This is also the reason many freelancers and small business owners end up skipping these valuable 1099 tax deductions. It's a headache to track and not worth the risk of an audit gone bad.
As a business owner, there's one word that strikes fear in your heart faster than just about anything else: Audit.
Did you know you're three times more likely to be audited as a small business owner or contractor? As of 2020, the IRS has even come forward claiming they intend to ramp up small business audits by a whopping fifty percent! Ouch.
Here are a few common reasons a small business gets flagged for an audit:
- Extravagant meal expenses
- An excessive number of deductions
- Large increases in deductions compared to previous years
The Costs of Bad Recordkeeping
If you cannot prove these business expenses are legitimate, you risk being fined upwards of 10% or $5,000, whichever is greater, on TOP of the new tax bill you now owe. The average amount ends up being around 20%.
Here's an example scenario: Without claiming the travel deductions, you would've owed an extra $3,000 in taxes. If those deductions are can't be proven during an audit, you will NOW owe the $3,000 PLUS another $600 for a total of $3,600. All because you couldn't provide proof that an expense was accurate—even if it was—due to poor bookkeeping. Who wants to fork over even more money to Uncle Sam than you already do?
The Solution: Digital Tracking
Now, this doesn't mean you should avoid deductions out of fear. If it's a legitimate deduction, you should claim it! It just means you need to be prepared in case an audit pops up. How? By being organized and knowledgeable.
Stacks of boxes full of crinkled receipts, some barely legible, take up precious space in your office. Every year, you spend hours trying to find a paper trail for each little purchase to make sure you're safe. That's just the way it is, though. Right?
Wrong! Today, keeping paper receipts for taxes is about as useful as the Yellow Pages book (do they even make those anymore?). Despite popular belief, an itemized paper trail is NOT required in order to keep up with business purchases. The IRS simply requires documentation of the purchase—preferably in a digital format.
Reasons Why Digital Tracking Takes Away the Stress of an Audit
Look, you can use 1099 excel spreadsheet templates to track expenses but c'mon, that's a lot of work. An internet connection and technology is all you need to make your expense tracking a breeze. Why track your daily expenses offline? Here we'll go over exactly why it is not a great idea.
1. Lost receipts
The biggest reason paper receipts are the worst way to track your expenses boils down to how easy it is to LOSE them. Maybe the cashier forgot to give you one. The dog chewed it up. It got washed in the laundry. It flew out of the floorboard of your dusty truck (hey, no judgment here). Whatever the reason for the missing paper, it's gone. When you use a digital tracking option…well, it's safe and waiting for you whenever you need it!
2. Storage mayhem
Another great excuse to dump the paper trail is not dealing with the organizational (or lack thereof) side. No more boxes piled to the ceiling and storage buildings you're scared to go into at this point. Seven years equals a LOT of boxes. Imagine having to dig through all of that if you need to look up a purchase from four years ago. Yikes! Digital receipts take very little space up in that fluffy cloud. Easily track your daily expenses with an app.
3. Time is money
You know the saying, but you're still spending HOURS every year sorting through paper receipts preparing for tax time. Doesn't that hurt your back? If you were using a digital tracking system, it would take you maybe ten minutes to pull a report with an accurate total of your expenses. You could save money while drinking your morning coffee! Audit? No problem.
Even if you have every single receipt, you may struggle to remember the details. Did you know one of the biggest triggers for an audit is meal and entertainment expenses? If you're asked specifics on a company lunch, a paper receipt won't help much. A digital recording would, though! You can save names, the purpose, and more the moment the lunch ends—no more worrying about remembering a year later.
5. Year-round Guidance
What's deductible? What's not? How do you make sure not to miss out on money-saving advice throughout the year? Hindsight is an expensive lesson to learn. What if there was a way to have your questions answered when you think of it, rather than just at tax time? Imagine letting go of that stress and burden because you have an expert in your back pocket. You'll know that an audit won't be an issue because you were well-advised from the start.
Use An Expense Tracking App Like Keeper Tax
Okay, so those are all great reasons. Sure. Now, what is a digital method? You could use your bank statements, of course. That's electronic and acceptable by the IRS. However, that doesn't exactly help with the last three reasons why digital tracking is ideal. After all, you'll still have to spend hours going through twelve months of statements, line-by-line, trying to tally up those expenses. You'll have to rely on your memory when it comes to what you purchased and who you ate that client lunch with on the 13th of March. Your bank won't be very helpful with tax advice either.
If only there were an app for that, right?? Even better, an app that could not only magically track every purchase instantly—but help you maximize your deductions BEFORE tax time comes around.
Imagine how easy tax time would be? The stress relief alone is worth millions—figuratively speaking, of course. No more boxes shoved to the brim with a million, taunting receipts. No more lost deductions that cost you thousands. NO MORE STRESS. Download expense reports at the push of a button. The word "audit" would now be a challenge you take with stride. You'd be prepared, after all.
Great news! There IS an app for that…and you can try it for free. So…what are you waiting for then?? Although there are many expense tracker apps or budgeting apps out there... let me tell you about Keeper Tax. Keeper Tax is hands down the best travel expense tracking app that automatically scans your credit card and bank account to categorize tax write-offs as well as track expenses (it is an alternative to Expensify). You'll receive text messages in real-time after you make a purchase and the app lets you label the purchase as a business write-off or a personal expense. The expense management tool is available on iPhone IOS and android. Go download the Keeper Tax app right now (no time like the present) and start saving money and your sanity.