The article below is up to date based on the latest tax laws. It is accurate for your 2017 taxes, which you will file by the April 2018 deadline. Learn more about tax reform here.
When you run your own business, travel seems inevitable, and when it comes to deducting that business travel on your taxes, it can feel like a laundry list of gray areas. If you ask a dozen friends who are business owners, and you will likely get a dozen answers.
Fortunately, it’s not nearly as murky as you may think. So, what are the do’s and dont’s of writing off business travel when self-employed? Here an overview of how to determine what is deductible on your next work trip.
What Are Tax Deductible Business Travel Expenses?
The three main guidelines for determining if your business travel expenses are deductible include:
- The travel must be specifically for business. If you are trying to deduct out-of-town business expenses, the travel must be directly related to the business you are conducting. For example, you can’t take a vacation to the Caribbean, do five minutes of work on your computer, call it a business trip and then deduct it on your tax return. However, if you attend a work conference in Hawaii, that can be considered a business trip, even though you’re going to a popular vacation destination.
- The business purpose must be specific and documented. Keep records indicating the specific purpose of the travel – i.e., the client’s name, and why it was necessary to be conducted at that specific location. You’ll also need to document your meetings, including who you met with and how frequently. Remeber that the more information you record, the better.
- Travel expenses will have to pass the “reasonableness test.” Finally, business travel expenses need to be a reasonable amount, ordinary and necessary, not extravagant – meaning that it has to be helpful to your business. Documenting the specific business purpose is even more important when the location happens in recognized resorts like beaches, ski resorts, and other popular vacation spots. Remember that example of the work conference in Hawaii? The trip was reasonable because the conference was being held in Hawaii.
What are Common Tax Deductible Travel Expenses?
There are a ton of small expenses you will encounter throughout your trip, however, here are the most common business travel expenses you can deduct:
- Transportation expenses. This encompasses all modes of transportation from your home to the final travel destination, which includes airfare, train fare, bus fare, taxi fare, and even Uber or Lyft fares. If you rent a car to use for business travel, the cost of the rental is tax deductible. You can also take the standard mileage allowance (of 53.5 cents per mile) for the use of your car associated with business travel, and tolls and parking fees paid can be deducted as well.
- Accommodations. This primarily includes hotel charges, but it will have to pass the reasonableness test. If you spent seven days in a location but used only one of those days to conduct business, the deduction should only be for the one day you conduct business. For hotel stays, always get an itemized bill at the end of your stay. This will serve to document your stay plus itemize any expenses that may not be included, such as movie rentals and mini-bar purchases.
- Meals and entertainment. Travel meals and entertainment are tax-deductible, but must also be reasonable, and entertainment for the benefit of the client should be well-documented. Finally, the IRS only allows you to deduct 50% of meal and entertainment expenses and you should document the date, business purpose, and who you met with for business.
Which Other Travel Expenses are Non-Deductible?
In addition to anything that is unrelated to your business, un-documented or doesn’t pass the “reasonable test”, here are a few more examples of travel expenses that aren’t deductible:
- Expenses for your spouse or family. Mixing business with pleasure is common, but when deducting business travel, you must separate the two. For example, if you’re taking your spouse or your entire family on the business trip with you, you have to be especially careful. You will only be able to deduct expenses that are specifically related to yourself, and to the business purpose of the trip. This includes all airfare, hotels, and meals and entertainment, so be sure to keep all your receipts – or even get separate bills to avoid confusion. However, keep in mind that the cost of the hotel will still be tax deductible as long as it’s just a single room. If you need two rooms, the second one won’t be deductible.
When you use QuickBooks Self-Employed, you can easily track your business income, expenses, mileage, and separate business and personal expenses all year round then export your information directly to TurboTax Self-Employed to make your taxes simple.