Suppose that you have just arrived from a two week trip to Europe, where you were able to close some deals while visiting some old friends. You’re so happy not only because you were able to snag more business, but you were able to bring home some souvenirs for your family and friends. And of course, you were able to squeeze in some time for relaxation and got to see top sights like Big Ben and the Eiffel Tower.
But did you know that you can even reduce your next tax bill by declaring your recent trip abroad? Indeed, a jet setting can save you a significant amount of money, but only if expenses satisfy certain conditions.
Business Related Travel Expenses are Tax Deductible
According to the Internal Revenue Service (IRS), you can deduct ordinary and necessary expenses for travel away from home or business as long as these are connected with your business or job. This applies to both domestic and international travel.
What are ‘ordinary’ expenses? The IRS defines this as a common or accepted expense in your trade or business. For instance, you can consider the costs associated with distributing promotional literature like newsletters and holiday cards as ordinary expenses.
On the other hand, a necessary expense is defined as something helpful and appropriate for your business or work. Your business trip, which allowed you to close new deals, can be considered as one.
The IRS says that for travel to be considered deductible, it should be ‘away from home.’ This stipulation is almost always satisfied with international travel. The IRS will consider you to be away from home if you are on travel outside your tax home (where you live or work) for a time longer than a typical day’s work.
Keep in mind, though, that eligible deductions for business travel are only for temporary work on the road. If you spent more than a year on the road for business travel, then it is considered an indefinite assignment and thus doesn’t qualify you for the tax liability. Even short assignments to the same place during a fiscal year may be considered by the tax authorities as an indefinite assignment.
Eligible Business Travel Tax Deductibles
Now you may ask—what are the travel-related costs that you can normally deduct on your tax bill?
Among the travel-related costs that you can deduct on your next tax bill are:
- It doesn’t matter whether you travel by plane or car; you can normally reduce the expenses related to getting to and from a business destination as long as it is not close to your tax home.
For example, you took a cab to get from the airport to the hotel where you met your client. You can deduct the cab fare as a work-related transportation cost. You can also declare car rentals, and even costs incurred when you took your own car (gasoline expenses, parking and toll fees, for example.) You can even claim the expenses of operating and maintaining a vehicle such as repairs, washing, oil change, and tire replacement as tax deductibles.
What if your client provided you with a free ticket? Or a friend in London gave you a ride? Obviously, you can’t declare these as deductibles.
But what if you took an ocean liner on your way to London? Can you also deduce the costs on your next tax bill?
The IRS has special rules when it comes to luxury water travel. There is a daily limit on the amount that you can deduct. The amount varies depending on the time of the year. It is typically 200% of the highest federal per diem rate allowable during the time of your travel.
For instance, the highest federal per diem for the period January 1 to March 31 is $428. The daily limit on luxury water travel is double that amount, which is $856.
So let’s say that your total bill for a five-day cruise to London from New York for business travel conducted in February is $5,000. You can only claim $4,280 as your deductible because you exceeded the daily limit of $856 per day.
- Shipping and Baggage. You can also deduct expenses that you incurred for shipping almost anything you need for your business or job while on travel. For instance, the $100 bill that you incurred for sending props or other materials required for a presentation.
- You can also deduct the full cost of the hotel room or other accommodations if your trip is overnight. Thus, you can reduce a $7000 per night stay at The Savoy on your next tax bill.
- You can deduce up to half of the cost of your meals if you are traveling for business. However, the meals should not be lavish or extravagant. There’s no clear-cut definition for a lavish or extravagant meal, but you can expect to get audited if you claimed a meal consisting of lobster and champagne as a deductible.
- You can also deduct any communication-related expenses like phone calls and faxes while you are traveling for business. This also includes international calls.
- Cleaning – this includes expenses for washing and ironing your clothes during the trip. Because you have to be presentable during your meetings with clients, right?
- Tips— you can also deduct the tips that you handed out to waiters, bellboys, and other workers.
Travel Considered Entirely for Business
The IRS maintains that only foreign travel which is spent solely for business is fully deductible. This means that if you spent your entire stay abroad on business-related activities, then you can claim all your travel expenses as tax-deductible.
Since you did go spend time visiting friends and sightseeing during your trip, then you’ll have to allocate between tax-deductible business expenses and the non-deductible personal ones.
But let’s face it–you do want to deduct the entire cost of transportation during your entire trip abroad, right? You can deduce your travel expenses even if you didn’t spend the entire trip on business-related activities if you meet any of these conditions:
- You don’t have substantial control. According to the IRS, you don’t have substantial control over your trip if you are not a managing executive, or you are not related to your employer. The IRS defines a managing executive as an employee who has the authority and responsibility to decide on the necessity for business travel.
You also don’t have substantial control if you are merely an employee who was ordered by your boss to go to say, Paris, for a business trip.
But if you’re self-employed, then you might not satisfy this condition at all. The IRS maintains that self-employed individuals and business owners have substantial control over arranging their business trips.
- You were outside the US for less than a week. The IRS will consider your travel entirely for business if you were out of the country for a week or less. However, you will have to count the day you return to the US and not the day that you left.
This can get a bit confusing if you were traveling to different parts of the US before you left for London. For instance, say your home is in Denver. You left for New York on Tuesday, stayed there for a few days for a series of meetings, before flying to London on Saturday morning.
You had several business meetings in London on Sunday and Monday, then spent the next two days sightseeing. You went back to the US on Thursday before going back to Denver on a Saturday.
Although you were away from your home for more than a week, you were out of the US for less than a week. Remember that the IRS won’t count the day you left your home.
So, you may be able to claim the costs of your stay in London from Saturday and Sunday, but you won’t be able to do so for Tuesday and Wednesday.
- You spent less than a quarter of your travel on personal activities. But what if you spent more than a week outside the US? Does this mean that you can’t claim that as business-related, and thus make you unqualified for tax deductibles?
You can, as long as you spent less than a quarter of your trip on personal activities.
So let’s say that you spent 14 days in London, and only got to see the sights and visit your friends in 1 to 2 days. You deduct the cost of the round trip plane fare, cost of meals, lodging, and other related expenses as mentioned earlier.
- The vacation was not a major consideration in arranging the trip. You can claim deductions on your tax bill if you can prove that a vacation was not a major consideration in arranging the trip.
Tips in Filing Business Travel Expenses
Now that you have an idea which business-related travel expenses you can claim as a tax-deductible, here are some tips that you should remember so that you will be able to maximize your savings the next time you file your tax returns:
- Keep track of all your receipts and records. You can save a lot of time in looking for receipts when you keep every slip that you get during the course of your travel. You should also write on the back of each slip the location and date, the name of the person that you met, as well as the reason of the expense. This way, you won’t have to scavenge for slips when it is time to file your tax returns.
- Document everything. If you’re taking a client to a fancy dinner, you can claim that as a deductible. But you should be able to justify to the IRS that the nature of the meeting warranted such a fancy dinner. Thus it is recommended that you document the business you discussed so that you can justify the claim or pass an audit.
If you attended conferences or meetings while on travel, it would be a good idea to keep the programs or brochures you received. You can also keep the emails sent to you by people whom you met during the business meetings as proof to back up your claim.
Make it a habit to write down the names and business relationships of all the people you met during your travel. Write down their names as well as the business discussed.
You should also know that the IRS does not require receipts for travel expenses of less than $75. So if you checked in a hotel for an overnight stay at a discounted price of $70, you’re not obligated to show the actual receipt.
- Try apps. If you have too many documents to keep track of, you might want to download and use apps for travel expenses. There are apps such as Tax Tracker that can help you in documenting business and travel expenses.
Mobile apps can monitor your travel expenses, time spent on the road, and miles traveled so you can file taxes and claim deductions quickly, easily, and accurately.
- Be honest. The best way to avoid a date with the IRS is, to be honest about declaring your tax returns. Deduct only the expenses that you are entitled to. Keep all supporting documents just in case you are called for an audit. Remember, you not only end up losing deduction but also pay additional tax, interest, and penalties if the tax authorities find out that you make unsubstantiated claims.
Worse, the IRS may subject your tax return to further scrutiny. And you don’t want them to start digging.
The bottom line is that you can make a lot of exemptions when you travel abroad for business purposes. Now that you know which travel expenses you can deduct, start saving those receipts and recording every expense. You’ll be surprised at the amount that you can save during the tax season.