Self-Employed Travel: Deducting Per Diem Expenses

If you're self-employed, you can deduct travel expenses on Schedule C (Form 1040) or Schedule F (Form 1040) if you're a farmer. These expenses can include transportation costs, meals, lodging, and other incidental expenses. Instead of deducting the actual meal expenses, you can choose to deduct meal and incidental expenses using a Per Diem rate, which varies by county. This method is popular among those who don't want to keep track of every meal receipt. It's important to note that you can't deduct expenses that are considered lavish or extravagant, or for personal purposes.

Per Diem vs. Actual Cost

When it comes to deducting travel expenses for the self-employed, there are two main methods: the Per Diem rate and the actual cost method. Both have their advantages and disadvantages, and it is worth calculating your deduction both ways to see which method will be more favourable for you.

The Per Diem rate is a fixed daily reimbursement used to cover various types of expenses incurred during business-related travel, including lodging, meals, miles driven, and incidental expenses. Per Diem rates are set annually by the General Services Administration (GSA) for destinations within the Continental US, and they vary depending on location and the time of year. The Per Diem rate for meals and incidental expenses (M&IE) covers all meals, room service, laundry, dry cleaning, pressing of clothing, and fees and tips given to service staff. The lodging category covers the cost of overnight stays in hotels, motels, inns, resorts, and apartments.

The Per Diem rate is often chosen by entrepreneurs and self-employed individuals because it simplifies the record-keeping process. Instead of having to keep track of and submit receipts for individual expenses, the Per Diem rate only requires a log of the time, place, and business purpose of each trip. This reduces the administrative burden and allows travellers to focus more on their business objectives. Additionally, the Per Diem rate can make tax reporting simpler and promote equity among employees travelling to the same location.

On the other hand, the Per Diem rate may not cover all expenses incurred during business travel, and travellers may need to pay out of pocket for any non-Per Diem expenses. Companies also risk overpaying or underpaying employees since the actual costs incurred may not match the Per Diem rate. Furthermore, employers must ensure that their Per Diem rates comply with tax regulations to avoid fines or penalties.

The actual cost method, on the other hand, involves deducting the exact expenses incurred during business travel. This method requires diligent record-keeping and can be more time-consuming, but it ensures that all expenses are covered. When using the actual cost method, it is important to keep track of all relevant receipts and documentation to support your deductions.

In terms of meal expenses, the self-employed can generally choose between deducting the actual cost of meals or using the standard meal allowance, which varies depending on the location of travel. As of the 2023 tax year, 50% of the cost of meals for business activities is deductible.

For transportation costs, the self-employed can deduct either the standard mileage allowance or the actual cost of gas, oil, and other vehicle expenses. The standard mileage allowance for the 2024 tax year is 67 cents per mile for business use. It is important to maintain good records of your deductible expenses, including the date, number of miles, and purpose of each trip.

Other common self-employed business travel expenses that can be deducted include transportation costs such as gas, airfare, car rental fees, taxis, and baggage fees; the cost of transporting supplies; dry cleaning and laundry while travelling; and business expenses such as internet and phone charges.

Mileage and Vehicle Expenses

When it comes to deducting vehicle expenses, the self-employed have a few options. The first is the standard mileage allowance, which is a set rate per mile that covers all expenses related to owning and running a vehicle for business purposes. This rate is often adjusted annually by the IRS—for example, the standard mileage rate for 2023 was $0.655 per mile, and in 2024 it is $0.67 per mile. The second option is to deduct the actual cost of expenses like gas, oil, repairs, servicing, insurance, and other expenses. This method may be more financially beneficial if your car is worth more than average or is more costly to operate and maintain than average.

There are some important distinctions to make when it comes to what counts as business mileage. Driving between two workplaces, from your home to a temporary workplace, meeting with clients, and running business-related errands all count as business mileage. However, commuting to and from your home to your permanent workplace or a second workplace does not count as business mileage and is therefore not deductible. Additionally, if your home is not your regular workplace, driving between home and work is considered a commute and is also not deductible.

If you are deducting vehicle expenses using the standard mileage rate method, you can also deduct tolls and parking fees incurred for business purposes. If you are using the actual expenses method, you can deduct parking fees and tolls, as well as depreciation or rental and lease payments, trailer rental costs, and interest payments on your personal car loan.

It's important to note that if you choose to use the standard mileage rate method in the first year of using your vehicle for business, you can switch between the two methods in subsequent years. However, if you choose to use the actual expenses method in the first year, you must continue with this method in the following years. Additionally, if you lease your vehicle, you must use the same method for the entire lease period and any extensions.

To claim deductions, it is essential to maintain good records of your mileage and expenses. For the standard mileage rate method, you must keep a timely log of your business and personal trips, including the date, the number of miles, and the purpose of each trip. You should also record your total mileage for the year by reading your odometer at the start and end of the year. For the actual expenses method, you must also keep a log of your mileage and maintain documentation and receipts for all expenses.

Lodging and Meals

As a self-employed person, you can deduct travel expenses incurred while away from your tax home for business purposes. This includes the costs of lodging and meals.

Lodging

You can deduct the actual amount spent on lodging while travelling for business. However, you must provide the necessary substantiation for these expenses. The IRS does not allow self-employed individuals to use the per diem amounts for lodging, which are reserved for cases where an employer reimburses an employee with a fixed daily amount.

Meals

You can deduct 50% of meal expenses for business activities. Instead of deducting your actual meal expenses, you can use the per diem rate for meals and incidental expenses. The per diem rate varies by location and is generally calculated at 75% of the full rate on the first and last day of travel. The average per diem rate for meals and incidental expenses within the continental US in 2022 was $93.

Transportation Costs

As a self-employed individual, you can deduct transportation costs as part of your travel expenses. Transportation costs can include gas, airfare, car rental fees, taxis, baggage fees, and other travel-related expenses.

If you drive your car for business purposes, you can deduct vehicle expenses. This includes driving to see a client, to a store to pick up supplies, or to a conference in another state. When deducting vehicle expenses, you can choose to deduct either the standard mileage allowance or the actual cost of gas, oil, and other car expenses. The standard mileage allowance for tax year 2023 is 65.5 cents per mile, and this will increase to 67 cents per mile for 2024.

If you choose to deduct the standard mileage allowance, you can also deduct parking fees and tolls in addition. However, if you choose to deduct the actual cost of gas, oil, and other car expenses, you cannot deduct parking fees and tolls on top of that.

For each trip, make sure to record the date, the number of miles, and the purpose of the trip for your records. There are apps available that can help you with this record-keeping.

Business Expenses

When it comes to business expenses, self-employed individuals can deduct a variety of costs incurred while travelling for work. These expenses must be "ordinary and necessary" and cannot be "lavish or extravagant" to qualify for deductions.

• Transportation costs: This includes gas, airfare, car rental fees, taxis, baggage fees, and other travel-related expenses. If you are driving your own vehicle, you can deduct either the standard mileage allowance or the actual cost of gas, oil, and other vehicle-related expenses. The standard mileage allowance for tax year 2023 is 65.5 cents per mile and will increase to 67 cents per mile in 2024.
• Meal expenses: Self-employed individuals can deduct 50% of meal expenses for business activities. Instead of deducting the actual meal costs, they can use the standard meal allowance, which is the federal meals and incidental expense (M&IE) per diem rate set by the General Services Administration (GSA). This rate varies by location and is typically calculated based on the cost of living in a given area.
• Lodging expenses: The cost of hotel, motel, inn, or resort stays, or apartment shares like Airbnb, can be deducted as business expenses when travelling for work.
• Incidental expenses: Self-employed individuals can deduct incidental expenses such as laundry services, dry cleaning, and pressing, as well as tips given to food servers and hotel staff.
• Display materials and supplies: The cost of transporting display materials, samples, or other supplies needed for business purposes is deductible.
• Communication expenses: Business-related phone calls, internet charges, and other communication expenses incurred while travelling are deductible.

It is important to note that good record-keeping is essential when it comes to claiming business expense deductions. Self-employed individuals should maintain diligent records of their travel dates, miles driven, and the purpose of each trip. Additionally, they should keep itemized receipts for expenses such as lodging, meals, and other relevant costs.

Frequently asked questions