Business Deduction or Personal Expense?
I’m looking forward to one of my favorite holidays—Thanksgiving, a day of seemingly endless eating and self-induced “food coma” naps.
From my Southern mom-in-law’s homemade cornbread stuffing to my best friend’s family recipe for Chinese chuk (a soup made of the turkey carcass), I love the fact that every family has their own special Thanksgiving traditions. No matter who is doing the cooking, it always seems like you can’t get to the food fast enough.
Unless you’re the cook, you’ll probably be traveling for Thanksgiving. Whether you fly or drive, the question always arises: Can you deduct your small business travel expenses for your Thanksgiving Day trip?
Here are some guidelines to help you decide if you can get a tax break on Turkey Day.
If you are traveling primarily for personal reasons, such as a vacation, the entire trip is a nondeductible personal expense.
However, you can deduct any expenses directly related to your business when you travel.
Example: if you attend continuing educational sessions during your vacation, then the registration fees and incidental expenses to the educational sessions are considered business expenses.
Exactly What Are Business Travel Expenses?
Here’s how the IRS defines Business Travel Expenses: travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.
For these expenses to be deductible, you must be away from your tax home (not your residence) for a period longer than one day’s work, and you must be away overnight. Your tax home is defined as the city or general area of your workplace.
You MUST KEEP RECORDS of your expenses to show the IRS. Keep your receipts and a detailed log of your expenses, including the dates and why the expenses are related to your business. The printed laser receipts most companies use tend to fade over time, making them hard to read. It’s a good idea to make copies of these receipts so you know they’ll be legible if the IRS ever asks to see them.
What Can You Deduct?
If your travel is business travel, you may be able to deduct the following expenses. Remember, you have to show that these expenses are DIRECTLY RELATED to your business:
- Air, Train or Bus Tickets: If you’re traveling primarily for vacation, this isn’t a business expense. If you are traveling primarily for business, you can consider the ticket as a business expense. If your travels are personal, but you take a side-trip for business, you can deduct travel expenses for the side-trip. If you’re using points or frequent flyer miles to get a free ticket, you can’t deduct the cost.
- Car Mileage and Expenses: Both from your home to your BUSINESS destination and any BUSINESS use while you are there. You can also deduct business-related tolls and parking. If you rent a car, you can deduct only the business-use portion of the car rental expenses.
- 50% of Meal Costs: You can either track the actual costs of your meals or use the standard meal allowance according to the IRS. The standard meal allowance varies by location so be sure to check with the IRS to determine the standard meal allowance for your destination.
- 50% of Business Entertainment Costs: These must be directly related to, or associated with, the conduct of your business. Record keeping is essential. You will need to keep a history of the business purpose, the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained.
- Dry Cleaning and Laundry Costs
- Business-related Calls: Including fax or other communications device.
Click Here to read IRS Publication 463. It covers Travel, Entertainment, Gift, and Car expenses.
Remember: the IRS requires you to keep detailed records of your expenses, which you must report on your tax returns:
- For sole proprietors and single-member LLCs, show these expenses in the “Expenses” section of Schedule C.
- For partnerships and multiple-member LLCs, show these expenses in the “Deductions” section of Form 1065.
- For corporations, show these expenses in the “Deductions” section of Form 1120.
This information is being provided as a general overview and cannot be construed as legal advice. For your specific business, you should consult your CPA or tax advisor.