Deducting Business Travel Expenses
Historically, there has been a lot of confusion surrounding the tax deductibility of travel expenses within the construction industry. The shift to a more remote workforce resulting from the pandemic has furthered complications and confusion. We will answer a few of the most frequently asked questions about deductible business travel expenses.
When Are Business Travel Expenses Deductible?
Business travel expenses are deductible when an individual must travel away from their tax home or main place of work for business reasons. This is a straightforward definition, right? Well, maybe additional clarification is needed.
An individual is traveling away from their tax home if they are away for more than an ordinary workday and need to sleep to meet the demands of their work while away. Obviously, this brings in the cost of traveling to the destination. It also brings in deductible expenses such as lodging, meals, cleaning (uniforms, work clothes, etc.) and telephone costs.
Where Is an Individual’s Tax Home?
The answer to this question is complicated. Generally, your tax home is your regular place of business, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located. For instance, if you’re living in Central New York while working in a main office in Syracuse, your tax home is considered Syracuse and the immediate surrounding area.
In the construction industry, individuals will often have more than one regular place of business because they work on different job sites. In these cases, their tax home is their main place of business or work. An individual’s main place of business or work is determined by:
- The total time the employee ordinarily spends in each place,
- The level of business activity in each place, and
- How much money the employee earns at each place.
It is important to note that commuting travel is not deductible. Therefore, an individual cannot deduct the cost of traveling between their main place of business or work and their residence. They can, however, deduct the cost of traveling between business locations. This means that traveling from the main office location to a job site would be deductible.
How Do You Handle Temporary Work Assignments?
It is common within the construction industry to have a temporary work assignment at a different location than the individual’s tax home. In cases where an employee’s work location assignment is temporary, the individual’s tax home doesn’t change, and the individual is considered to be traveling away from home for the entire period of the assignment. Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for one year or less.
An employer can deduct an employee’s travel expenses if the employer paid or incurred those expenses during an employee’s temporary work assignment and the employee’s work assignment doesn’t last for more than one year.
If an employee is given an indefinite work assignment at a different location, the individual’s tax home changes to the new work location. This would be the case if the employee is scheduled to work at a job site for work expected to last longer than one year. In this situation, the employer cannot deduct the employee’s expenses as business travel expenses while they are working at the new location because the employee is not considered to be traveling away from his tax home. Individuals with indefinite work assignments must include in income any amounts they receive from their employer for living expenses.
What Travel Expenses Are Deductible?
To be deductible, business travel expenses must be ordinary and necessary expenses for traveling away from home for a business, profession or job. An ordinary expense is one that is common and accepted in the individual’s trade or business. A necessary expense is one that is helpful or appropriate for the business.
Examples of deductible business travel expenses include:
- Travel by airplane, train, bus or car between the individual’s home and business destination;
- Fares for taxis or other types of transportation between an airport or train station and a hotel, or from a hotel or to a work location;
- Shipping baggage and sample or display material between regular and temporary work locations;
- Using a personal car for business travel;
- Lodging and meals while away;
- Dry cleaning and laundry while away;
- Tips paid for services related to any of these expenses; and
- Other similar ordinary and necessary expenses related to business travel.
What Records Should Be Kept?
The business traveler should keep well-organized records that substantiate the amount, time, place and business purpose of their travel expenses. A business traveler must substantiate the cost of each separate expense for travel, lodging and meals. Incidental expenses, such as taxis, fees and tips, may be totaled in reasonable categories.
Besides keeping receipts, canceled checks, credit card statements, bank statements (for debit card purchases) and other documents, an individual traveling for business should keep a diary, log or calendar noting the dates and times of any business travel, as well as the business reason for that travel.
As the deductibility of travel expenses continues to become increasingly complex, it is a great idea to have a plan. I always recommend consulting with your tax professional up front to properly document and structure an expense reimbursement plan to maximize the tax benefits of business travel costs.
Contributing Author: Nicholas L. Shires, CPA, is the partner-in-charge of tax services at Dannible & McKee. Nick has over 19 years of experience providing tax and consulting services to a wide range of clients, including individuals and privately held companies. For more information on this topic, you may contact Nick at firstname.lastname@example.org or (315) 472-9127.