Abraham Zaiderman, a successful and highly sought after restaurant consultant based in Potomac, Maryland, will be the first to tell you that taxes are one of the most painful parts of running a business. For self-employed inidividuals, you need to pay a 15.3% self-employment tax on all profits. You must also pay federal and state income taxes, which are tiered to your income. Accordingly, you want to take all possible measures to minimize your tax burden. If you travel regularly, you can deduct many of your travel expenses.
Unfortunately, knowing what travel expenses can be deducted is a serious challenge for many business owners. They may miss many travel deductions that they didn’t know about. They could also face steep fines if they deduct expenses that they weren’t supposed to.
Here are some guidelines that you should follow while deciding what to deduct as you travel.
Make sure that you identify your tax home first
The IRS discusses the regulations on travel deductions on topic number 511. This statute shows that you may only deduct travel expenses that are incurred outside of your “tax home.”
What is your tax home? The IRS states that the definition is a bit flexible. For some businesses, it may be a single city that they operate again. For others, it may be a 50-mile radius that crosses state lines.
Your tax home is defined by how frequently you visit certain locations. If you spend a significant period of time in two different cities that are within driving distance, those cities and all areas in between them would probably be considered your tax home. You should speak with your accountant if you aren’t sure whether an area qualifies for deductions. However, if you need to fly to another state, then expenses will almost certainly qualify.
Travel frugally and only deduct necessary expenses
The IRS requires that all travel deductions be for ordinary and necessary expenses. You will need to pay for meals and basic accommodations, so those shouldn’t usually be a problem unless you are paying for luxury suites. However, you will not want to deduct late-night trips to expensive bars, losses at the casino or the admittance fee to an obvious tourist destination.
“Even if an expense can be justified, you may want to look for a cheaper option,” explains Abraham Zaiderman. You are much more likely to get audited if your expenses seem excessive. You may be able to justify them during the audit, but it will be more stress than you need.
Maintain accurate records and keep all receipts
Wouldn’t it be great if the IRS just took you at your word when you filed your taxes? Sadly, that isn’t the world that we live in.
The IRS realizes that many people fudge the records of their travel expenses. You want to make sure that you can reliably defend them during an audit.
You need to keep detailed tax records of all of your trips. Make sure that you show where you visited, what your purpose was, who you met and what follow up messages you sent to new business contacts. This is important to show a chain of events that led to the travel expenses.
You will also need to keep receipts of all expenses. Make sure they are stored in a safe place, so you can easily access them during an audit.
Only deduct expenses during the days that you are doing business related activities
Many business owners decide to merge their business trips with vacations. There are couple of reasons they do this:
- They can save a lot of money and hassle by only having to pay for single ticket and book their hotel once.
- They think that they can deduct their vacation costs as travel expenses.
The first point is legitimate. The second unfortunately is not. You can only deduct travel expenses incurred during the days that you are doing necessary work for your business. Let’s say that you travel for a two-day conference and then spend the next five days sightseeing and snorkeling. You can only deduct the expenses for the first two days of your trip. “It’s a great idea to mix business with pleasure,” explains Moti Ferder, a frequent business traveler and Design Director of Lugano Diamonds in Newport Beach, California, “but not if the result is an audit or tax penalty, so keep good records and play by the rules.”