Business travel can take many forms. Whether it’s to meet with prospects and clients, to attend industry conferences for networking or to enroll in a business seminar, travel can sometimes be a frequent but necessary expense to ultimately win and keep clients. Because you are responsible for covering your own travel-related costs, the IRS allows you certain write-offs to reduce your tax burden as a self-employed professional.
The Internal Revenue Code is extremely complex, making even the most seasoned freelancer pause when distinguishing between business costs and personal expenses. As one of the most common expenses freelancers incur, travel is deductible if it meets specific IRS rules and requirements. Before deciding which business travel expenses fall under the “deductible” category, consult a qualified accountant or use software for guidance on the various rules and exceptions for allowable write-offs.
The Basics: What Qualifies as a Business Expense?
You probably know the basic definition of an expense, but do you know how the IRS defines a deductible travel expense as it applies to your freelance business? The IRS defines travel expenses as “the ordinary and necessary expenses of traveling away from home for your business, profession or job.” In other words:
- Ordinary expenses are common and accepted in your profession.
- Necessary expenses are helpful and appropriate for your trade or business.
Understandably, terms such as “necessary expenses” can create problems for freelancers who neglect to confirm which travel deductions are allowable under IRS rules and certain circumstances. One way to test whether your travel expenses are “ordinary and necessary” to your business is by asking yourself the following questions:
- Is this expense closely related to my business?
- Is this expense lavish or extravagant? (More on this later)
- In the event of an audit, can I provide sufficient evidence or proof that this expense is “ordinary and necessary” for my business?
Determining Your Tax Home
The next step in writing off business travel expenses is determining if the length and distance of your business trip make you eligible for tax deductions. Sarah Kessler of Inc. advises to only write off travel expenses for trips that require you to be away from your tax home long enough for an overnight stay (i.e. longer than a normal workday or long enough where you require sleep or rest to conduct business away from home). Therefore, it’s important that you designate where your tax home is (i.e. the city or town where you regularly conduct business) in order to determine if you qualify for the tax write-off.
For freelancers, this can be confusing since you may work in coffee shops, co-working spaces, public libraries or even your living room. In this case, your tax home would be the address where you regularly live. If you don’t have a regular place of business or live in multiple places throughout the year, you are classified as “itinerant” and will not be able to deduct travel expenses. This is an important distinction, since to write off your travel expenses, the IRS states that your business travel must require you to be away from a designated tax home, but as an itinerant, you have none.
To establish a tax home, consider:
- The amount of time you normally spend in the place where you work or conduct business.
- The level of business activity that happens in the place where you work or conduct business.
- The amount of income you generate in the place(s) you work, and whether the amount is significant or insignificant.
For example, if you work out of a Seattle office for 10 months out of the year, where you earn approximately $100,000, and work in a Houston office the remainder of the year and earn approximately $20,000, the Seattle address would qualify as your tax home.
Common Tax Deductions for Business Travel
Once you’ve confirmed your tax home and that your business trip meets the IRS definition of business travel, it’s time to start identifying expenses that are deductible according to IRS rules. Travel expenses typically fall under the following categories:
- Meals (including food, beverages, taxes and tips. Keep in mind that you cannot deduct the cost of meals as both a travel and entertainment expense.)
- Transportation (including train or plane tickets, as well as taxis, buses and limousine services, and gas, parking and toll fees if you drove your own vehicle or rental.)
- Other miscellaneous expenses, such as Wi-Fi charges, charges for business calls, dry cleaning, tips, etc.
Let’s take a closer look at these travel expenses and some of the scenarios where they’re safe to write off and those where they’re not.
The money you spend on travel-related meals, including taxes and tips, are 50% deductible if you meet the IRS definition of travel away from your tax home or if the meal is business-related entertainment (i.e. it’s for entertaining a client, customer or employee). Meals that are not related to entertainment qualify for the deduction if it is not “lavish and extravagant” or if it falls under what’s appropriate for the type of business conducted during the meal.
The IRS will not reject deductions based solely on the dollar amount or whether you dined at a nightclub versus a traditional restaurant. Nevertheless, you’ll have to justify the meal by documenting the client(s) or individuals present and the business discussed. As an alternative to deducting the exact costs of your food expenses while traveling, you can opt to deduct the fixed cost of meals—what’s called a standard meal allowance—for each day of your stay.
Like meals, you can deduct 50% of lodging expenses for business travel that requires an overnight stay. However, deducting your hotel costs can become murky if you bring along your spouse or partner whom doesn’t have a business reason to travel with you. Consequently, the IRS will only allow you to write off the portion of the hotel bill you would have paid as a solo traveler.
One difference between meal and lodging deductions is that you can only write off the actual cost of your hotel stay. The IRS doesn’t provide a fixed cost option or standard lodging amount (similar to the standard meal allowance) for hotel accommodations.
From the money you used to purchase your plane ticket, to the cost of taxi rides to and from your hotel and business destination, you’ll be able to deduct these transportation expenses from your business travel as long as:
- The mode of transport was the most appropriate transportation option.
- You purchased the full price of the ticket. (Note: Deducting the estimated cost of a plane or train ticket that was purchased using frequent flyer miles or a similar rewards program does not qualify as a deductible travel expense.)
Generally, costs related to taking taxis, buses and train rides to and from the airport and train station are fully deductible. You can also write off transportation between your hotel and your clients’ work location, your temporary office or a convention. If you decide to drive your personal vehicle or rent a car, the IRS allows you to deduct the costs of gas, parking and tolls.
Incidental expenses incurred during business travel, including fees and tips given to baggage carriers, porters and other hotel staff, can be deducted at $5 per day. You cannot deduct incidental expenses if you incur or deduct meal costs during your trip.
You can write off the following expenses if you fall under IRS guidelines for traveling away from your tax home for business purposes:
- Shipment fees for sending luggage or marketing materials (e.g. brochures, posters, etc.) between your regular and temporary workplaces.
- Dry cleaning and laundry.
- Business communication fees, such as phone calls, fax transmissions and internet service.
- Computer rental fees, public stenographer fees and costs associated with operating and maintaining a house trailer.
Things to Watch Out For
You may decide to extend your business trips for general sightseeing or to visit family and friends. If you decide to extend your business travel for a side vacation, you can only deduct the business-related portion of the trip, including the round-trip airfare to and from your business destination.
Even if you take a weeklong vacation, you can still deduct the costs of fees for any seminars, workshops or other business programs you attend, so long as it directly relates to your business. Still, be careful what you deduct in these cases. Attending workshops that only cover general business topics or watching promotional videos sponsored by an advertiser won’t qualify as deductible expenses and are likely to be flagged by the IRS.
Finally, transportation via a cruise ship, ocean liner or other luxury water vessel for business purposes is deductible up to twice the highest federal per-diem rate normally paid to federal government employees who travel for business purposes. You must still deduct meal costs up to the 50% limit before applying the daily per-diem rate.
For a list of the per-diem daily limits on luxury water travel, visit the Luxury Water Travel section of IRS Publication 463. Additionally, if you’re attending a convention, meeting or seminar aboard the cruise ship, you can deduct up to $2,000 worth of travel expenses for the given tax year.
Best Practices for Avoiding an Audit
Getting hit by an IRS audit can be stressful and expensive, especially if you’re not prepared to pay the possible penalties should agents deem your business travel as an illegitimate write-off. Keeping receipts of your meals, transportation and other travel expenses is a good practice but usually not enough.
Along with storing receipts, take copious notes, store emails and file away materials from business meetings, conferences, workshops and any other events you attend while traveling. This will build a case in your favor as to how and why you deducted your travel expenses as ordinary and necessary to your business should the IRS question a deduction. For example, if you plan to deduct travel expenses incurred while attending a conference, make sure you keep a copy of the agenda to show how the event directly relates to your trade or business. Assembling a paper trail is crucial to protecting yourself in the event of an audit.
Additionally, your travel log or diary should record the following for each business trip:
- The start and end dates.
- The primary purpose.
- The location or destination.
- Total mileage (if traveling by car).
- The time, location and description of the business activity.
- Total spending on meals, lodging, transportation, office supplies, gifts and other miscellaneous items associated with typical business operations.
- Names, titles and occupations of any other persons present during meals.
Finally, never underestimate the value of hiring a tax advisor to help you prepare the necessary paperwork for claiming deductions and avoiding the common filing mistakes that result in an audit. Financial software can also expedite and facilitate the entire process.