With business travel picking up again and summer fast approaching, many business owners may be mulling trips that combine work with vacation or other personal activities.
A quick refresher on the IRS rules related to deducting business vs. personal travel costs can help you reduce your tax bill next year.
Business expenses must be "ordinary and necessary" to be deductible for federal income tax purposes. When it comes to business travel, that means you can deduct the ordinary and necessary expenses of traveling away from your home for business for more than one day.
"Home" refers to the city or general area where you work, regardless of where you live. If you have more than one place of business, your tax home is your main place of business.
When traveling within the United States, you can generally deduct 100% of your travel expenses to get to and from the destination (for example, airplane tickets and cab fares) if the trip is primarily for business. The determination of whether travel is primarily for business turns on how much time you spend on business purposes vs. personal purposes. For example, if you travel for 10 days and spend seven days visiting clients and three sightseeing, the trip is primarily for business.
If you spend more of the trip on personal than business purposes, you can't deduct any of your travel expenses to and from the destination. You can, however, deduct expenses you incur while at your destination that would otherwise qualify as business expenses.
When your trip is primarily for business, you also can deduct the cost of your lodging and under temporary rules, you can deduct 100% of meal costs for 2021 and 2022. (This deduction is scheduled to revert to 50% of meal costs in 2023.) You may also deduct other qualified business expenses incurred on the days you spend on business. But you generally can't deduct expenses incurred by a companion unless that person is an employee.
So, if you're traveling with your spouse and pay more for double occupancy lodging than you would pay for single, you can deduct only the single rate. You can, however, deduct 100% of a car rental because the cost would be the same if you were alone.
Saturday Night Rule
You'll want to keep in mind the special rule regarding Saturday night stayovers, which often can result in lower airfare. This rule applies when staying over will reduce the overall cost of the trip.
Specifically, the sum of the airfare with a Saturday night stay and the additional meal and lodging expenses must be less than the lowest available airfare without a Saturday night stay at the time of booking. In these circumstances, you can deduct your lodging, meals (subject to the applicable limit) and other business-related expenses for the extra time.
For foreign travel, you'll need to allocate your travel expenses on a day-to-day basis between business and personal days, deducting only the portion allocable to business days. Business days include:
- Transportation days,
- Days your presence is required (even if you spend most of the day on personal activities),
- Days you spend on business, and
- Weekends and holidays that fall between business days.
The IRS recognizes four exceptions to this general rule. You don't have to allocate any of your travel expenses to and from a foreign destination if:
- You're out of the country for seven consecutive days or less (counting the day you return to the country but not the day you leave). For example, if you travel to London for a four-day meeting and spend two more days on personal activities, that's considered seven days out of the country.
- You're out of the country for more than one week but spend less than 25% of that time on personal activities (counting both the day you leave and the day you return). For example, you fly to Japan and spend 14 days on business and five on personal activities, with one day traveling each way. That's a total of 21 days, but you've spent less than 25% (5/21) of the time on personal activities.
- You don't have substantial control over your travel arrangements. This exception generally doesn't apply to business owners, executives or the self-employed.
- Vacation isn't a major consideration for the trip.
In each of these cases, your travel is considered "entirely for business." You can deduct 100% of your travel expenses to and from the destination, plus your lodging and meal expenses (subject to the applicable limit) for the business days.
Additional rules apply for foreign conventions. For example, you must show that it's as reasonable to hold the convention outside of the North American area as in it. The tax code defines "North America" broadly — for example, including Costa Rica and the Bahamas — for this purpose.
Build a Record
The rules for deducting business travel can be complicated, but the tax savings can be significant. Contact your CPA with any questions about which costs are deductible and how to ensure you have proper documentation.