Employers and employees who travel for business may deduct certain types of travel expenses. Following are some general guidelines.
Generally, the round-trip cost of traveling for business is deductible whether the taxpayer stays away from home overnight or not. However, the IRS makes an important distinction between “business transportation” — a broad label that would apply to round-trip travel during the day — and “business travel,” which includes an overnight stay. For qualifying business travel, the taxpayer is allowed to deduct the entire cost of lodging and incidental expenses (as well as 50% of meal expenses).
To qualify for business travel status, the business trip must:
- Involve overnight travel
- Be temporary — expected to last one year or less
- Be away from the “tax home” — generally, the taxpayer’s principal place of business
To deduct travel expenses, employers may want to first consider implementing an “accountable plan.” Generally, an accountable plan requires that the employee adequately account for the business expense and return any unaccounted for advances within a reasonable period of time. Accountable plans benefit both the employee and the employer because expense reimbursements/advances that are properly accounted for are free of income-tax withholding and the employer’s and employee’s shares of FICA taxes.
Employees potentially may deduct unreimbursed ordinary and necessary business travel expenses. However, this deduction must be taken as an itemized deduction, and only the amount exceeding 2% of adjusted gross income will be deductible.
Employees should be careful to meet the IRS’s substantiation requirements. Generally, employees will be required to retain receipts and keep a logbook recording specific expenses related to business travel.