Understanding Tax Deductions For Employee Travel Expenses

Employees can deduct certain expenses incurred while travelling for work, but these expenses must be ordinary and necessary, and they must be incurred while travelling away from the employee's tax home. The IRS defines ordinary and necessary as expenses that are ordinary for a business, given the industry it's in, and necessary for carrying out business activities. Tax home refers to the general area or city where the employee's main place of business or work is located, not the location of their family home.

Meals while travelling

Meal expenses must be "ordinary and necessary", and not deemed unreasonable, lavish, or extravagant. The IRS defines an "ordinary" expense as one that is "common and accepted" in your line of work, and a "necessary" expense as one that is "helpful and appropriate". Meals do not have to be strictly business-related, but they must meet the lavish or extravagant rule. There is no dollar limit on how much can be spent, but the meal must be appropriate to the circumstances.

There are two ways to calculate meal expense deductions: the actual expense method, and the standard meal allowance. The former involves keeping track of what you spend on meals (including tips and tax) en route to and at your business destination, then deducting half of the total. The standard meal allowance involves deducting a set amount for each day of your business trip, based on the federal rate for meals and incidental expenses. This amount varies depending on where and when you travel, and the deduction is generally limited to 50% of the standard meal allowance.

Transportation costs

In the United States, the Internal Revenue Service (IRS) allows for the deduction of certain transportation costs under specific conditions. Here is an overview of how transportation costs are treated for tax deduction purposes:

• Ordinary and Necessary Expenses: Transportation expenses must be considered ordinary and necessary. This means they should be common and accepted in the taxpayer's trade or business, as well as helpful and appropriate. The expenses should not be deemed unreasonable, lavish, or extravagant.
• Tax Home and Temporary Work Assignment: Transportation costs are deductible when an employee travels away from their "tax home" or main place of work for business reasons. The IRS defines "travelling away from home" as duties that require an individual to be away from their tax home substantially longer than a typical workday, and they need to sleep or rest to meet work demands while away. Transportation expenses for temporary work assignments lasting a year or less are generally deductible.
• Types of Transportation Costs: Deductible transportation expenses may include travel by airplane, train, bus, car, or other means of conveyance between the individual's home and their business destination. It also includes fares for taxis, airport limousines, or other transportation between the airport/train station and a hotel, as well as between the hotel and the work location.
• Personal Vehicle Usage: If an individual uses their personal vehicle for business purposes, they can deduct actual expenses or use the standard mileage rate, along with business-related tolls and parking fees. Rental car expenses are deductible only for the business-use portion of the trip.
• Commuting Expenses: It is important to note that commuting expenses, such as transportation costs between an individual's home and their regular or main job, are generally not deductible.
• Record-Keeping: To claim transportation expense deductions, taxpayers must maintain proper records, including receipts, cancelled checks, and other documents supporting the deduction.
• Reimbursements: If an employee is reimbursed for their transportation expenses by their employer, they may not need to include the reimbursement as income, provided certain conditions are met. However, if the reimbursement is more than the expenses, the excess amount must be included as income.

Lodging

When it comes to lodging, the IRS considers a few factors to determine if the expenses are tax-deductible. Firstly, the trip must be "ordinary and necessary" for conducting business and far from the individual's "tax home." The "tax home" is typically where the individual's family lives, but if their main place of business is elsewhere, that becomes their "tax home." The trip should also consist "mostly" of business activities, with travel days counting as workdays.

For lodging expenses to be deductible, the trip must require the individual to be away from their "tax home" for longer than a regular workday, and they need to get sleep or rest to meet work demands. Lodging expenses are generally deductible if they are reasonable and not deemed lavish or extravagant. This includes hotels, motels, Airbnb stays, and even reimbursing a friend for crashing on their couch. If the trip is primarily for business, it is possible to add a few vacation days and still deduct the lodging expenses. However, if the trip crosses the line from "business trip" to "vacation," with more days spent on personal activities than business, the lodging expenses become non-deductible.

It is important to note that if an individual brings their family on a business trip, they can only deduct lodging expenses equivalent to what they would pay if travelling alone. Additionally, when it comes to Airbnb, the lines can get blurry, and it may be harder to justify deductions for significantly different lodgings. Sticking to traditional lodging options like hotels and motels may help avoid scrutiny during an audit.

To claim lodging expenses, it is essential to maintain proper documentation, such as receipts and records, to support the deductions.

Dry cleaning and laundry

Laundry expenses are generally considered personal expenses and are not tax-deductible. However, if you require laundry services for business purposes, you can deduct the cost from your taxable income. For example, if you are a social media influencer and need to wear a particular dress for professional purposes, you can deduct the cost of its laundry expenses.

To qualify as a deduction, an expense must be business-oriented or acceptable in your line of work. The IRS approves of an expense as long as it is both ordinary and necessary for your business. So, if you require laundry services while on a business trip, you can deduct the cost from your taxes. However, if you are not on a business trip and wish to deduct laundry for your regular clothing, you cannot do so.

Some common freelance professions that can claim laundry as a tax deduction include performing artists, nurses/healthcare professionals, construction workers, and consultants.

It is important to note that only reasonable travel expenses are deductible. Expenses that are deemed unreasonable, lavish, or extravagant are not deductible. Additionally, you must have proper records, such as receipts, cancelled cheques, and other documents that support your deduction.

Business calls and communication

These expenses must be "ordinary and necessary" and cannot be deemed unreasonable, lavish, or extravagant. For example, the cost of renting a computer for a business trip is deductible, but renting a sports car would not be.

It is important to keep well-organized records of expenses, such as receipts, to support any claims for deductions.

Frequently asked questions