Tax Treatment of Travel Expenses
If you are self-employed, you may be able to deduct the ordinary and necessary expenses of traveling away from home for your business. If you are an employee and incur unreimbursed travel expenses while traveling from your “tax home,” these expenses are deductible as miscellaneous expenses subject to the 2 percent of adjusted gross income floor (if you itemize your deductions on a Schedule A). These expenses can include the cost of transportation, lodging, and/or meals.
Special rules apply to members of the Armed Forces, National Guard, and Military Reserve. For more information, see IRS Publication 3, Armed Forces’ Tax Guide.
“Tax home” defined
Your tax home is your principal place of employment or business. For tax purposes, you must be traveling on business away from your tax home, not your personal home (your residence), to be able to deduct travel expenses. For example, if you work in the metropolitan Boston area but live in Maine, metropolitan Boston is your tax home for the purposes of deductibility of travel expenses.
What if you have more than one regular place of business?
If you usually work at more than one place of business, your principal place of business (tax home) is determined by comparing at which place of business you:
- Spend the most time
- Conduct the most business activities
- Produce and/or derive the most income from
None of these three elements is controlling; rather, the elements must be weighed together to determine which place should serve as your tax home.
Deductibility of local travel expenses
If you are self-employed and your residence is your principal place of business, you can deduct expenses you incur in traveling from your residence to any other work location.
Generally, your unreimbursed travel expenses are deductible, with the following limitations:
- If you go on a one-day business trip in the general area of your home, you may deduct your transportation costs but not your personal meal expenses.
- If you or your employer has two places of business, you may deduct the cost of traveling directly from one business location to the other. “Side” travel along the way is not deductible.
- If your tax home is in one location and you travel a distance from your principal residence to your place of work, your travel expenses are not deductible.
Say you live in Boston but your employer is located in Connecticut. Each Monday, you travel to Connecticut and stay in a motel there, then return to Boston on Fridays. Your transportation, lodging, and meal costs while in Connecticut are not deductible.
- If you are temporarily assigned to work in an area away from your normal place of work, you may deduct the cost of traveling to that area, as well as the costs of meals and lodging. However, deductions are not allowed on temporary assignments that are expected to last more than one year.
The rules applying to deductibility of travel expenses on out-of-the-ordinary temporary assignments (such as seasonal jobs) may vary, and you should check with your accountant or other tax advisor on a case-by-case basis.
Deductibility of overnight travel expenses
The following nonreimbursed travel expenses are deductible when you are on an overnight business trip away from your principal place of business (your tax home):
- Train, plane, taxi, auto, or other transportation expenses
- Hotel or other lodging expenses
- Meal costs. However, generally only 50 percent of the cost of a meal is deductible.
- Telephone and FAX expenses
- Baggage charges (including baggage insurance)
- Entertainment expenses, subject to certain limitations.
If you travel on a business trip via a cruise ship, your deductible costs are restricted by a special per diem formula. Check with the IRS or your tax advisor or accountant for specific per day rates and this formula.
What if you have no principal place of business?
If the nature of your work is such that you are almost constantly traveling, you may be able to designate your principal home as your tax home for purposes of deducting travel expenses. However, to do so, you must demonstrate the following:
- You maintain a personal residence (house, apartment, condominium) on which you pay expenses (e.g., mortgage or rent) both while living there and while on the road.
- You conduct some of your business in the area of your residence and live at said residence when in the area.
- The residence is where you grew up or lived for an extended period of time, or you have family members there, or you return there often.
Generally, the cost of traveling between your home and your place of work is not deductible. This is true even if the distance is large and/or if your place of work is not served by public transportation. Moreover, the following apply:
- Commuting costs you spend as part of a car pool are also not deductible.
- The IRS does not consider the cost of cellular car phone calls made while commuting to or from work deductible.
- Discussing work with passengers while commuting to or from work does not qualify the travel costs for deduction
Exceptions to commuting expenses rule
There are two exceptions under which you can deduct commuting expenses:
- When away from your tax home on a business trip, you may deduct transportation costs (including taxi fares) from your place of lodging to your day’s first business call and transportation costs between business locations throughout the day.
- You may deduct the cost of using your vehicle to carry equipment to work if you can demonstrate that the expenses are in addition to your ordinary commuting costs.
Say you drive to work each day at a cost of $30 per week (gas and tolls). One week per month, you must rent a trailer to haul drilling equipment with you to and from work. The trailer rental costs $80 per week. Here, the $30 per week commuting cost is not deductible, but the $80 per week trailer cost is.
Commuting to a temporary place of work
Any location where you perform work for your employer for a short period of time (a few days or weeks) or on an irregular basis (e.g., a few days each month) is considered a temporary place of work. The commuting costs from your home to a temporary place of work are deductible if the following apply:
- The temporary place of work is located in the metropolitan area where you generally live and work.
- You have a regular place of work outside your home, or your place of work is generally in an office in your home.
If the temporary place of work is outside of the metropolitan area where you live and work, commuting expenses are deductible if the assignment to said temporary place of work is expected to, and in fact does, last for less than one year.
When can you deduct meal expenses?
In order to deduct meal expenses (with the exception of expenses for meals directly related to or associated with business), you must be away from your tax home on a business trip that necessitates your staying away overnight.
Say you fly out of town to meet with a client, stop to eat lunch at the airport before going to the client’s office, then return home that evening. The cost of your airfare is deductible, but the cost of lunch is not. However, if you had stayed overnight to meet a client the next day, all your meal expenses, as well as your lodging expense, would be deductible.
If you purchase a meal while on overtime, the cost of that meal is not deductible if the overtime is spent at your regular place of business, even if part of the overtime is spent sleeping at your place of business.
Calculating meal expenses
If you have not kept, or find it difficult to keep, a record of allowable meal expenses while on business trips, you can opt for the per diem allowance allowed by the IRS without actual substantiation of the amount of the meal expenses. The amount, which covers meals and incidentals such as tips, ranges from $46 to $71 per day, with the higher amounts for travel outside the continental U.S. or for certain designated high-cost areas and for all transportation-industry workers. Check IRS Publication 463 for meal allowance rate tables.
How do you claim the IRS meal allowance?
The IRS meal allowance splits each day into four six-hour portions (starting at midnight), and you may claim 25 percent of the meal allowance for each six-hour portion of each day you are away.
If you leave on a business trip at 6 a.m. Tuesday and return at 12 p.m. Thursday, you would take a 75 percent meal allowance for Tuesday, a 100 percent meal allowance for Wednesday, and a 50 percent meal allowance for Thursday.
What if a spouse lives in a separate city?
If a husband and wife live in separate cities during the week, the IRS maintains that the spouse living away from home cannot deduct the cost of living away from the shared residence.
You and your wife maintain a home in Boston. Your wife works in Boston, while you live and work in New York during the week and stay in Boston on weekends. Even though you file a joint return, your expenses while in New York are not deductible.
What if you are living away from your tax home for an extended period of time?
If you are on a temporary assignment that causes you to live away from home for more than one year, your expenses are not deductible if the assignment was expected to last for more than one year. However, if the assignment is expected to and does last for less than one year, your living expenses are deductible.
Can you deduct travel expenses for a spouse or dependent who accompanies you on a business trip?
No, you cannot deduct the travel expenses of a spouse or dependent who goes with you on a business trip (or to a business convention), unless that spouse or dependent is your employee and had a justified business reason for going on the trip (i.e., could have claimed a business travel deduction had he or she gone on the trip by himself or herself).
You can deduct costs related to your spouse’s or dependent’s direct participation in deductible business-related entertainment.