While there are many risks of being a freelancer, it cannot be denied that there are plenty of benefits, too.
One advantage of being self-employed is that you can make more money than you would if you were an employee. You can also work in the comfort of your home.
Moreover, freelancers like you also get to enjoy many tax deductions like home office and business travel.
If you haven’t realized, going on business travel can benefit your trade.
Here are three good ideas that you may want to explore if you want to maximize your tax deductions by going on a business trip anytime soon:
- Visiting a client
Perhaps you have a client in an area away from your tax home or your primary place of work. You might want to visit that client and several customers to strengthen your relationship with them.
You don’t need to spend the entire them talking to them. You can schedule a meeting for a few hours. Just make sure to keep a note of the things you talked about during the meet.
- Meeting a Vendor
Do you know a supplier of a vendor that you can meet in Miami or another area that’s far from your home? You might want to meet him to negotiate a new deal, or how you can improve your business relationship together.
- Attend a conference
Are there any workshops, seminars, or conventions that you can participate in? Attending one that’s relevant to your trade may teach you new skills or update your knowledge. The activity may also give you the perfect time to meet prospective clients or vendors.
What expenses can you write off?
Any of the abovementioned ideas are justifiable enough to be the purpose of your next business travel. What’s more exciting is that you can deduct all your business travel-related expenses on your next tax returns.
Remember this–you can write off your business travel expenses as long as the primary purpose of your trip is ordinary and necessary for your work.
An ordinary expense is defined as common and accepted in the trade or business that you are in. If you are in the IT field, then your participation in an information security summit can be considered an ordinary expense.
On the other hand, the IRS considers travel as a necessary expense if it is appropriate for a taxpayer’s business.
You can write off the following travel expenses:
- Meal Expenses
You can also deduct the costs of the meals that you had while you were on business travel. However, there’s only a 50 percent limit on meal expenses.
There are two methods that you can choose from in figuring out your meal expenses.
The first is the actual cost. This simply means claiming 50 percent of the actual cost of your meals during your business trip. If you are to use this method, you should have receipts or records of your actual expenses.
The second option is to deduct the standard meal allowance (SMA) of $51 a day, which is the rate for most of the small localities in the US. The advantage of this option is that you don’t have to keep every receipt, as you simply subtract the SMA.
However, SMA is a bit low. Thus you may not be able to enjoy larger deductions on your tax return if you opt for this method.
Keep in mind that you can claim meal expenses even if your dinner or lunch with a prospective client didn’t lead to a deal. So even if you met potential clients, you can deduct the costs of their meals in your next tax return.
But you may also wonder—can you claim the meal expenses during a business meeting? After all, it is a common practice to discuss a deal or get to know a prospective partner while eating.
The answer is yes–you can also claim meal expenses that you incurred while entertaining customers or potential business partners.
In fact, it is not only the meals served to the clients that you can claim as tax-deductible. You can even include taxes and tips, cover charges if you brought your guests to a nightclub. The rent that you paid for a room in which you held a dinner party for your guests can also be deducted as a meal expense.
But the IRS won’t allow claiming deductible on lavish and extravagant meals. There’s no definite dollar amount for a lavish or extravagant meal, so it can really be tricky for most business owners to determine which meals to expense.
Let’s say that you treated a potential client to dinner at a five-star hotel. Would that be considered a lavish or extravagant meal? Perhaps, but you can also justify that it is reasonable given the circumstances. Maybe the client that you met is the CEO of a Fortune 500 company, whom you just can’t bring to any ordinary restaurant.
- Lodging Expenses
Unlike in meal expenses where you are limited to a 50 percent tax claim, you can deduct 100% of your lodging expenses during business travel.
You can even stay an extra day in your destination and claim associated stay-over costs. For example, you had your last meeting on a Friday, but you didn’t leave until Saturday afternoon because you wanted to get a reduced fare on that day. You can claim the stay-over costs on Saturday even though you had no business-related activities on that day.
But if you stayed for a couple more days just to enjoy the sights, then you can’t deduct the hotel charges for those extra days.
- Transportation Expenses
Whether you traveled by car, bus, train, or airplane, from your home to the business destination, you can write off your transportation expenses during a business trip.
But if you were provided tickets by a client, your cost is zero.
If you were able to fly because of a frequent flyer reward, then you won’t be able to claim the airfare.
You can also claim transportation expenses to and from the airport to your hotel, and the hotel to the offices of your clients or customers.
If you brought your own car, you can write off your gas expenses, toll fees, and parking. You can even charge the expenses you incurred for maintaining your vehicles, like a car wash, replacement of tires, or oil change. However, you have to keep your receipts to prove that you indeed had paid for the said services while you were on business travel.
Aside from the three major expenses, you can also write off the following:
- Shipping of baggage
- Dry cleaning and laundry
- Business calls
- Other out-of-pocket expenses such as computer rental fees
The rule of thumb is that expenses that are directly related to your business trip can be written off. For example, you had paid for the shipping of your brochure or documents needed for a seminar or convention. You can deduct the shipping expenses.
But you can’t expense personal charges like gym or fitness fees. You can’t also deduct fees for movies or games.
Things to Remember Before Traveling for Business
Now that you have learned the expenses that you can claim on your next tax return, you should then know the things that the IRS will look into before it accepts your tax deduction claim.
- Establish the Purpose of Your Travel
One, your travel should be primarily for business. You can prove this by showing that you have at least one business appointment or meeting schedule before you leave home.
This means that you can’t just depart for the Bahamas or Florida with the hopes of meeting a potential client there. Or collecting business cards of people you would present as business associates.
An invitation to a conference, emails, and other correspondences—these are enough to prove to the IRS that you went to a particular destination for business-related activity.
But what if you don’t have an invitation or email proving that you went to a certain destination for business activity? Let’s say you want to spend a vacation in Miami, and also get some potential clients there.
You can mix pleasure with business, so to speak, by placing several advertisements in the area.
For example, you’re a distributor of computer software. You are hoping to expand your business by distributing more products in Miami.
What can you do to achieve that goal? You can post online ads showing to prove that indeed, you were looking for new business contacts in the area.
And when you get there in Miami, meet a couple of those who have responded to your advertisement. Document your meeting by taking photos, or keeping the business cards of your prospects.
However, you should also look at the time spent on business-related activities during your trip. It would be hard to justify travel costs for a week-long trip to Miami if you only spent 2-3 days meeting with clients. The IRS will likely call your attention if you declared that you spent just half of your time in Florida meeting, prospective customers or dealers.
What if your residence is just a few hours away from Miami? Does that mean you can’t claim your travel expenses as tax-deductible?
You can, as long as you can prove that you had to sleep or rest in Miami so that you can meet the demands of your work. Let’s say that you slept in the hotel where you held a meeting to avoid possible traffic problems. The IRS will consider your overnight stay in Miami to be business-related, and allow you to make a claim.
- Allocate your expenses
If you traveled for a business meeting but also went to see some old friends or visited tourist destinations, you will have to allocate your expenses. You can only deduct your business-related expenses and not the costs that you incurred for personal activities.
For example, you rented a car to take you to Miami from New Orleans. Your business travel amounted to around 2,000 miles round trip. But on your way back to NOLA, you decided to take a detour to Jacksonville to visit your old college buddy.
Because the detour to your college buddy is personal and not business-related, you cannot claim your expenses for that part of the trip.
Generally speaking, you can’t claim the expenses of your spouse if he or she accompanied you on your business trip unless the presence of your significant other was necessary.
No, your spouse taking down notes for you during your trip isn’t justifiable. Your partner should have done something more critical, like serving as your interpreter or even helping you close a deal.
- Keep your receipts and related documents
Lastly, keep all your receipts during the trip. You may even write down details at the back of the receipt, like the names of the business associates you met and the purpose of the meeting.
If your total expense during the trip is $75, you don’t need to show your receipts, though.
Don’t throw away other papers such as a conference or seminar program. Those papers can justify your tax deduction claim.
Going on business travel is like hitting two birds with one stone. Your firm not only stands to benefit from you embarking on business travel, but you can also reduce your tax obligations.
You can meet a potential client during business travel, or strengthen your relationship with your current customers. You can also attend a convention or seminar to enhance your skills, or learn a new one.
Moreover, you can write off business travel expenses like lodging, transportation, and meals, although the latter has a limit of 50 percent of the total costs.
The IRS, though, has been quite strict when it comes to business travel claims. You can fend off an audit by properly allocating your expenses, keeping receipts and related documents, and establishing the purpose of your travel.
If you’ll follow the tips mentioned in this article, then you should have no problems claiming business travel deductions.