Travel Expenses To Satellite Office: Are They Deductible?

Travel expenses are a common source of confusion for those seeking to deduct them from their tax bills. The rules vary depending on the country and the type of worker, but there are some general principles that hold true across the board. For tax purposes, travel expenses are costs associated with travelling to conduct business-related activities. They are tax-deductible only if they were incurred for this purpose. Only ordinary and necessary expenses are deductible; anything deemed unreasonable, lavish, or extravagant does not count.

Travel expenses must be ordinary and necessary

When it comes to travel expenses, the IRS has strict rules about what counts as "ordinary and necessary". Here are some key points to consider:

• The travel must be for business purposes and must be "ordinary and necessary" for your industry. Personal trips or vacations are not deductible.
• To be considered a "business trip", you must leave your "tax home", which is typically the city or general area where your main place of business is located. The trip should be longer than a normal work day and involve conducting business in another location.
• The trip must consist "mostly" of business activities. The IRS measures this in days; for example, if you spend five days meeting with clients and two days vacationing, it qualifies as a business trip. However, if you spend three days with clients and four days on vacation, it's considered a vacation.
• Travel expenses must be "ordinary and necessary" and not lavish or extravagant. For example, renting a luxury car when a standard vehicle would suffice is not considered necessary.
• Proper documentation is crucial. Keep records of your travel plans, itineraries, and receipts for expenses. This is essential if you are ever audited by the IRS.
• If you are self-employed, you can claim travel expenses on Schedule C (Form 1040).
• When travelling internationally, different rules may apply. For example, if you spend more than a week outside the USA, you must spend at least 75% of your time conducting business for the trip to qualify as a business trip.
• You can deduct travel expenses such as plane, train, and bus tickets, laundry, lodging, and 50% of eligible business meals.
• If you bring friends or family on a business trip, you can only deduct expenses that would have been incurred if you were travelling alone. For example, you can deduct the cost of a hotel room for one person, even if you bring family members along.
• When driving your own vehicle, you can deduct actual expenses (e.g. gas, insurance, parking fees) or use the standard mileage rate method for deductions.

You must be away from home to deduct travel expenses

To deduct travel expenses, you must be away from your "tax home". This is the entire city or general area where your main place of business or work is located, regardless of where your family home is. For example, if you live in Chicago but work in Milwaukee, you cannot deduct travel, meals or lodging in Milwaukee because that is your tax home.

If you work in multiple locations, your tax home is the general area where your main place of business is located. To determine your main place of business, consider the length of time spent at each location, the degree of business activity in each area, and the relative significance of the financial return from each area. The most important consideration is the length of time spent at each location.

You are considered to be travelling away from home if your duties require you to be away from the general area of your tax home for a period longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away.

You can deduct travel expenses paid or incurred in connection with a temporary work assignment away from home. However, you cannot deduct travel expenses paid in connection with an indefinite work assignment. Any work assignment exceeding one year is considered indefinite.

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.

Travel expenses must be business-related

For travel expenses to be tax-deductible, the travel must be primarily for business purposes. The trip must be "ordinary and necessary" for the business, and the purpose of the trip must be established in advance. The IRS defines "ordinary and necessary" as expenses that are "ordinary" for a business, given the industry it's in, and "necessary" for the sake of carrying out business activities.

If you are travelling to a satellite office, it's important to note that you can only deduct the business-related portion of your travel expenses. For example, if you spend three days meeting with clients and four days on vacation, the trip is considered a vacation by the IRS. However, you may still be able to deduct specific expenses incurred while on your trip that were directly related to your business, such as 50% of the cost of a business meal.

If you are travelling outside of the United States, different rules apply. If you are outside of the country for more than a week (seven consecutive days, not counting the day of departure), you must spend at least 75% of your time conducting business for the trip to qualify as a business trip. If you spend less than 75% of your time on business, you can still deduct travel costs proportional to the amount of time spent working.

Allocation is required if travel combines business and pleasure

If your trip combines business and pleasure, you can only deduct your travel expenses if the trip is primarily for business. The IRS is vigilant about taxpayers attempting to classify a non-deductible personal trip as a business trip. The primary purpose of a trip is determined by the facts and circumstances of each case, including the amount of time spent on personal activities compared to the amount of time spent on activities directly related to business.

If your trip is primarily personal, none of your travel expenses are deductible, even if you engage in some business activities. However, you may be able to deduct particular expenses incurred during the trip if they would otherwise qualify as business deductions. For example, if you meet with clients while on vacation, you can deduct 50% of the cost of the meals.

If your trip is primarily for business, you can deduct travel expenses to and from your destination. However, you must exclude any private expenses, such as sightseeing, entertainment, and visits to family or friends.

Foreign travel

Foreign travel expenses are fully deductible if you spent 100% of your time abroad on business. However, if you engage in any non-business activities, you may need to allocate your travel expenses between deductible business expenses and non-deductible personal expenses.

If you spend less than one week outside the US, combining business and personal activities, your trip is considered entirely for business, and you can deduct all business-related travel expenses. The same applies if you spend less than 25% of your total time abroad on personal activities.

If you spend 25% or more of your time on personal activities, you must allocate your travel expenses between business and personal activities to determine the deductible amount.

Examples

• Kelly travels from Chicago to Phoenix to visit her friend Susan for two weeks. While in Phoenix, she meets with two customers and discusses business contracts over lunch. Kelly cannot deduct the cost of the trip to Arizona. However, she can deduct the cost of the two business lunches, subject to the limitations on meal expenses.
• Rebecca, a sole trader landscape gardener, travels to London for 12 days to exhibit at the Chelsea Flower Show. She spends six days at the show and takes the opportunity to do some sightseeing for two extra days. Rebecca can only claim deductions for the business-related portion of her travel. She can deduct her return airfare to London, bus fares to and from the airport, costs associated with working at the show, accommodation in Chelsea up to and including the last day of the show, and meals and incidental costs on the days she attended the show. She cannot claim accommodation, meals, or transport expenses on the days noted for sightseeing, any additional private costs, costs of visas, passports, or travel insurance, or any expenses for her son James, who joined her on the trip.
• Noah, a sole trader interior designer, flies to Broome on Sunday evening and returns to Perth two weeks later. He works Monday to Friday of the first week and Monday to Friday of the second week. On the weekend in between, he does some sightseeing and catches up with friends. Noah can claim deductions for his return airfare to Broome and taxi to his hotel and from the hotel to the airport, accommodation in Broome for all nights, costs of undertaking his work in Broome (such as tool hire), and meals and incidental costs of his work. He cannot claim the cost of sightseeing on the weekend or the dinner he has with friends.

Strict limits apply to meal costs

When it comes to meals, the IRS recommends using a standard meal allowance rather than saving every receipt. The standard meal allowance refers to the federal rate for meals and incidental expenses, and the amount varies depending on where and when you travel. These per diem rates are updated periodically to reflect regional inflation and are published on the General Service Administration website and in IRS Publication 1542, Per Diem Rates (for Travel Within the Continental United States).

The deduction for business meals is generally limited to 50% of the unreimbursed cost. Meals must be non-entertainment-related. In 2018, the tax law changed, rendering entertainment expenses 100% non-deductible. So, if you go to a dinner theatre show with a client and the meal portion is not itemized on your theatre ticket, you cannot deduct it.

Meals eaten alone while travelling are deductible. The cost of dining alone is a deductible expense only if your business trip is overnight or long enough to require that you stop for sleep or rest.

If you entertain business guests at home or away, you may be able to deduct a portion of the cost, provided you meet the usual deductibility rules for meals and entertainment. However, even if you meet the requirements, you can only deduct 50% of the cost of the meals.

A special exception to the 50% rule applies to workers who are away from home while working under Department of Transportation regulations. This group of workers includes air transportation employees, interstate truck and bus drivers, railroad employees, and merchant mariners. For these workers, meals are 80% deductible.

A standard meal allowance simplifies record-keeping. You may elect to deduct half of a Standard Meal Allowance (SMA), rather than half of the actual cost of your meals, laundry, cleaning, and tips. The advantage of using the standard meal allowance is that you don't have to keep records of actual meal expenses, although you still have to keep records to prove the time, place, and business purpose of your travel.

Frequently asked questions