Travel expenses have traditionally been a mainstay of small business tax deductions.
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But what many small business owners don't know is that travel expenses aren't automatically deductible. When it comes to travel deductions, the IRS has a multitude of restrictions that could significantly impact your bottom line tax burden.
As long as you are traveling for something work related, you can deduct your expenses on your company's tax return, right? Unfortunately, it's not that easy. The IRS does allow qualified travel expenses to be deducted for tax purposes. The issue is what the IRS considers to be qualified travel expenses.
The types of expenses the IRS considers deductible include the costs of traveling by air, train, bus, or car between your home and your business-related destination. Additional travel expenses incurred at your business destination (e.g. car rental and cab fare) may also be deductible. Meals, lodging, and tips usually qualify even if the employer chooses to provide employees with a standard meal allowance.
Good recordkeeping is essential for travel deductions. Employees should be required to provide receipts for all travel-related expenses and those receipts should be kept on file just in case the IRS requests verification of deducted expenses.
Qualified Business Travel
Determining the deductibility of specific travel expenses is the easy part. The hardest pill for most small business owners to swallow is that the IRS has a very specific definition of qualified business travel. The IRS defines business travel as any duties that require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work. Your tax home is the place where your main place of business or work is located.
If your business requires you to be away from your personal residence or town on an ongoing basis, the IRS may consider your work location to be your tax home, and your travel expenses would no longer be deductible. For example, if you live in Dallas but your business is located in Tampa, travel expenses to Tampa may not be deductible. Additionally, food and lodging expenses incurred when you work in Tampa may not be allowable deductions simply because – for IRS purposes – Tampa is the company's tax home.
Multiple Tax Homes
A further wrinkle is thrown into the deduction equation when a business has multiple locations or tax homes. For instance, suppose a company has branches in Chicago, New York, and Minneapolis, and the owner or employees distribute their time among the three locations. To determine the deductibility of travel expenses, the IRS considers a number of factors including the level of activity and financial return of each business location. However, the most significant factor is the amount of time spent at each branch. The branch where the owner or employee spends the most amount of time is considered to be his tax home. Travel expenses related to the other two locations would be deductible, but the expenses related to the tax home would not be.