Travel Expenses: What's Included In Your Agi?

Travel expenses refer to the costs incurred while travelling for business-related activities. These expenses are tax-deductible, but only if they are deemed 'ordinary and necessary'. The Internal Revenue Service (IRS) considers employees to be travelling if their work requires them to be away from their 'tax home' for longer than a typical workday, and they need to rest before returning to work.

Examples of deductible travel expenses include airfare, lodging, transportation services, meals and tips, and the use of communications devices. However, travel expenses incurred while on an indefinite work assignment that lasts more than a year are not deductible for tax purposes.

Travel expenses for business purposes

To be deductible, travel expenses must be incurred while travelling away from your tax home for a period substantially longer than an ordinary day's work, and you must need to sleep or rest to meet the demands of your work while away.

Deductible travel expenses include:

• Travel by airplane, train, bus, car, or other mode of transportation between your home and your business destination.
• Fares for taxis, airport limousines, or other types of transportation between the airport/station and your hotel, and between the hotel and your work location.
• Shipping costs for baggage and display materials between your regular and temporary work locations.
• Operating and maintaining your car while travelling for business, including actual expenses or the standard mileage rate, as well as business-related tolls and parking fees. If you rent a car, you can only deduct the business-use portion of the expenses.
• Lodging and non-entertainment-related meals.
• Dry cleaning and laundry.
• Business calls and communication, including fax machines and other devices.
• Tips for services related to any of these expenses.
• Other similar ordinary and necessary expenses related to your business travel, such as transportation to and from business meals, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer.

It is important to note that you cannot deduct expenses that are lavish, extravagant, or for personal purposes. Additionally, if you receive reimbursements from your employer for travel expenses, there may be tax implications depending on whether the reimbursement is considered taxable income or not.

Travel expenses for employees

Expenses can include lodging, personal car mileage reimbursement, flights, ground transportation, tips to bellhops, meals, tips to waiters, room service, and other incidental expenses.

The expenditures that an organisation will reimburse can be found in the company's business travel policy. Employees should familiarise themselves with their company's policy as expenses, as varied as dry cleaning and gym membership, can be covered for employees on extended trips in addition to the expected travel costs, housing, and meals.

Typically, organisations pay employee travel expenses in three ways: company credit cards, charge cards, or a per diem. Company credit cards are issued to employees who must travel frequently for business. Employees may charge most of the expenses they incur on a business trip to the company credit card. For reimbursement of incidentals such as tips and fast food, employees will need to fill out an expense report when they return from their trip. Charge cards are convenient for employees as they do not have to pay for business expenses before reimbursement. However, employees may still need to turn in receipts and other supporting documentation.

A per diem is a daily allowance of a certain amount of money that an employee is given to cover all expenses. The employee is responsible for making sound travel expense choices within the parameters of the amount of money that they are allotted daily. Some companies pay directly for transportation and housing but give travelling employees a per diem for all other expenses, including meals and ground transportation.

Employees who travel for business are advised to stay up-to-date on company travel policies and costs covered for reimbursement. Expenses that fall outside of the policies are generally not reimbursed or covered. Receipts are required by most companies except for those that pay a per diem.

To stay on top of reimbursable expenses, employees are often given a deadline by which they need to file an expense report and turn in applicable receipts.

If you have questions about what constitutes appropriate travel expenses in your organisation, check with your manager and the Human Resources department.

Travel expenses for self-employed individuals

If you are self-employed, you can generally deduct the ordinary and necessary expenses of travelling away from home for business purposes. This includes transportation, lodging, meals and tips. However, you cannot deduct expenses that are lavish or extravagant, or that are for personal purposes.

To be considered 'travelling away from home', your duties must require you to be away from the general area of your 'tax home' for a period substantially longer than an ordinary day's work, and you must need to sleep or rest to meet the demands of your work while away from home. Your 'tax home' is generally the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home.

If you are travelling away from home for business purposes, you can deduct the costs of:

• Travel by plane, train, bus or car between your home and your business destination
• Fares for taxis or other types of transportation between the airport or train station and your hotel, and between the hotel and the work location of your customers, your business meeting place, or your temporary work location
• Shipping of baggage and display materials between your regular and temporary work locations
• Using your car while at your business destination, including actual expenses or the standard mileage rate, as well as business-related tolls and parking fees
• Lodging and non-entertainment-related meals
• Dry cleaning and laundry
• Business calls and communications while on your business trip
• Tips for any of the above expenses
• Other similar ordinary and necessary expenses related to your business travel, such as transportation to and from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer

Instead of keeping records of your meal expenses and deducting the actual cost, you can generally use a standard meal allowance, which varies depending on where you travel. The deduction for business meals is generally limited to 50% of the unreimbursed cost.

If you are self-employed, you can deduct travel expenses on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), or if you are a farmer, on Schedule F (Form 1040), Profit or Loss From Farming.

Tax-deductible travel expenses

The IRS defines 'travelling away from home' as being away from your 'tax home' for a period longer than an ordinary day's work, and requiring sleep or rest to meet work demands. Your 'tax home' is generally the entire city or general area where your main place of business or work is located.

Deductible travel expenses include:

• Travel by plane, train, bus, or car between your home and business destination
• Fares for taxis or other transportation between the airport/station and hotel, or hotel and work location
• Shipping costs for baggage and display materials between work locations
• Using a personal car for business
• Dry cleaning and laundry
• Business calls and communication
• Tips for related services
• Other similar, ordinary, and necessary expenses

You can also deduct 50% of meal costs.

If you are self-employed, you can deduct travel expenses on Schedule C (Form 1040), or Schedule F (Form 1040) if you are a farmer.

Non-deductible travel expenses

When it comes to non-deductible travel expenses, there are a few key points to consider. Firstly, it's important to understand that only "ordinary and necessary" travel expenses are deductible. This means that expenses deemed unreasonable, lavish, or extravagant are generally not eligible for deduction.

• Personal vehicle expenses: The cost of using your personal vehicle for business travel may not be deductible if it is considered unreasonable or excessive.
• Taxi or rideshare expenses: Taxi or ridesharing services used for business travel may not be deductible if they are deemed unnecessary or lavish.
• Airfare, train fare, or ferry fees: The cost of air travel, train tickets, or ferry rides may not be deductible if they are for personal trips or are considered extravagant.
• Laundry and dry cleaning: The cost of laundry and dry cleaning services while on business travel may not be deductible, especially if they are deemed excessive.
• Shipment costs for work-related materials: Shipping costs for sending work-related items may not be deductible if they are not essential to the business activity.
• Equipment rentals: Renting equipment such as computers or trailers may not be deductible if they are not necessary for the specific business trip.
• Indefinite work assignments: Travel expenses incurred for work assignments lasting more than one year are generally not deductible. This includes situations where the assignment is expected to last more than a year, even if it ends up being shorter.
• Personal meals and entertainment: The cost of personal meals and entertainment, such as dining out or attending shows, is typically not deductible. However, 50% of business-related meal expenses may be deductible.
• Commuting expenses: Daily transportation costs between an individual's home and their regular or main job are generally not deductible. This includes costs such as gas, parking fees, and public transportation fares.
• Gifts: The cost of gifts given to clients or customers may not be deductible, especially if they are considered lavish or excessive.

Frequently asked questions