Travel Expenses

The information below is taken from the IRS website as well as from the Audit Technique Guide that instructs IRS agents on what aspects of travel expenses are important to review, and the applicable law.

Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. Generally, employees deduct these expenses using Form 2106 (PDF) or Form 2106-EZ (PDF) and on Form 1040, Schedule A. You cannot deduct expenses that are lavish or extravagant or that are for personal purposes.  Self-employed individuals deduct travel expenses on Schedule C.

You are traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away. 

Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals, or lodging in Milwaukee because that is your tax home. Your travel on weekends to your family home in Chicago is not for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.

In determining your main place of business, take into account the length of time you are normally required to spend at each location for business purposes, the degree of business activity in each area, and the relative significance of the financial return from each area. However, the most important consideration is the length of time spent at each location.

Travel expenses paid or incurred in connection with a temporary work assignment away from home are deductible. However, travel expenses paid in connection with an indefinite work assignment are not deductible. Any work assignment in excess of one year is considered indefinite. Also, you may not deduct travel expenses at a work location if it is realistically expected that you will work there for more than one year, whether or not you actually work there that long. If you realistically expect to work at a temporary location for less than one year, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become nondeductible when your expectation changes.

You may deduct travel expenses, including meals and lodging, you had in looking for a new job in your present trade or business. You may not deduct these expenses if you had them while looking for work in a new trade or business or while looking for work for the first time. If you are unemployed and there is a substantial break between the time of your past work and you're looking for new work, you may not deduct these expenses, even if the new work is in the same trade or business as your previous work.

Travel expenses for conventions are deductible if you can show that your attendance benefits your trade or business. Special rules apply to conventions held outside the North American area.

Deductible travel expenses while away from home include, but are not limited to, the costs of:

1. Travel by airplane, train, bus, or car between your home and your business destination. If you are provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero.

2. Using your car while at your business destination,

3. Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another

4. Meals and lodging (you MUST have lodging receipts; no lodging receipt = no deduction for lodging!!!)

5. Tips you pay for services related to any of these expenses.

6. Dry cleaning and laundry.

7. Business calls while on your business trip. This includes business communications by fax machine or other communication devices.

8. Other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to and from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer.

Instead of keeping records of your meal expenses and deducting the actual cost, you can generally use a standard meal allowance (referred to as per diem), which varies depending on where you travel.  Here is the link to the current per diem rates:  http://www.irs.gov/pub/irs-pdf/p1542.pdf

The deduction for business meals is generally limited to 50% of the unreimbursed cost.

If you are an employee, your allowable travel expenses are figured on Form 2106 or Form 2106-EZ. Your allowable unreimbursed expenses are carried from Form 2106 or Form 2106-EZ to Form l040 Schedule A, and are subject to a limit based on 2% of adjusted gross income. Refer to Topic 508 for information on the 2% limit. If you do not itemize your deductions, you cannot deduct these expenses. If you are self-employed, travel expenses are deductible on Form 1040, Schedule C (PDF), Form 1040, Schedule C-EZ (PDF) or, if you are a farmer, Form 1040, Schedule F (PDF).

If you are a member of the National Guard or military reserve you may be able to claim a deduction that reduces adjusted gross income rather than an itemized deduction on Form 1040, Schedule A, for unreimbursed travel expenses paid in connection with the performance of services as a reservist. To qualify the travel must be overnight and more than 100 miles from your home. Expenses must be ordinary and necessary. This deduction is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. These expenses are claimed on Form 2106, or Form 2106-EZ and carried to the appropriate line on Form 1040. Expenses in excess of the limit can be claimed only as an itemized deduction on Form 1040, Schedule A.

Good records are essential. Refer to Topic 305 for information on record keeping. For more information on these and other travel expenses, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.

GUIDANCE GIVEN TO IRS AGENTS PERFORMING AUDITS OF TRAVEL EXPENSES

The following information is taken from the IRS Audit Technique Guide for Business Consultants, but is applicable for most all travel regardless of profession.

Pre-Audit

When an examiner is performing a pre-audit analysis, he or she should expect to see a separate line item for travel. If no travel expense is reflected on the return, the examiner may want to follow-up to determine if travel expense may be incorrectly characterized on the return. The taxpayer may fail to allocate between the personal and business nature of the expense, as required under Internal Revenue Code section 274. The examiner will also need to prepare pertinent interview questions and request specific documentation on the Information Document Request. See Exhibits D and E.

Audit Techniques

A thorough interview is very important to find out where the taxpayer’s client base is located and how often the taxpayer travels. The examiner should be alert to companion/family travel in and outside of the United States. The examiner can focus on extended travel beyond the actual business purpose and companion travel by testing the large, unusual or questionable items and sampling a time frame (i.e. 1 month).

Law

To be deductible under IRC section 162(a) (2), an employee’s traveling expense must be: (1) ordinary and necessary, (2) incurred in pursuit of a trade or business, and (3) incurred while away from home. Commissioner v. Flowers, 326 U.S.465 (1946), 1946-1 C.B. 57. 

An employee’s tax home is generally considered to be located at, or in the vicinity of, the employee’s regular (or principal if more than one regular) place of business; while performing services there, an employee may not deduct the cost of meals and lodging, even if the employee maintains a permanent residence elsewhere. Rev. Rul. 93-86, 1993-2 C.B. 71; Rev. Rul. 75-432, 1975-2 C.B. 60; Rev. Rul. 60-189, 1960-1 C.B. 60.

If the employee has no regular or principal place of business, the employee’s tax home is the employee’s “abode in a real and substantial sense.” If the employee has neither a regular or principal place of business, nor an abode in a real and substantial sense, the employee is an itinerant and effectively is never away from home. Rev. Rul. 73-529, 1973-2 C.B. 37; Rev. Rul. 71-247, 1971-1 C.B. 54; Rev. Rul. 60-189.

If the employee has two or more regular places of business, the tax home is located at the principal place of business. Rev. Rul. 93-86; Rev. Rul. 75-432; Markey v. Commissioner, 490 F.2d 1249 (6th Cir. 1974). Thus, expenses of travel incurred while discharging duties at a location that is removed from the principal post of duty (i.e., incurred at the non-principal place of business) are deductible if the other requirements of IRC section 162(a)(2) are met. The location of an employee’s principal place of business is a question of fact; important factors include: total time ordinarily spent at each of the business posts, the degree of business activity at each post, and whether the financial return with respect to each post is significant or insignificant. Rev. Rul. 54-147, 1954-1 C.B. 51.

The employee is treated as being “away from home” during any period of employment at a single location only if the employment is temporary. Rev. Rul. 93-86. For this purpose, employment that is realistically expected to last for 1 year or less, based on an objective determination at the time employment is begun, is treated as temporary (in the absence of facts or circumstances indicating otherwise). However, an indefinite or regular work location does not necessarily become temporary because of brief and infrequent work assignments to other locations. Blatnick v. Commissioner, 56 T.C. 1344 (1971). Finally, an employee is not “away from home” unless the employee is at the assigned work location long enough to require an overnight stay. United Statesv. Correll, 389 U.S.299 (1967), 1968-1 C.B. 64.

IRC section 274(d) provides that no deduction shall be allowed under IRC sections 162 or 212 for any expenditure away from home unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his or her own statement the amount, time, place and business purpose of the expenditure. IRC section 274 and Treas. Reg. sections 1.274-5T(c) (1) and 1.274- 5A(c) (1) require that the elements of any expenditure must be recorded "at or near the time" when the expense was incurred. Although not required, these sections contemplate that the taxpayer will maintain a diary, travel log, trip sheet, or similar documentation while the taxpayer has current knowledge of the travel expenditure. The taxpayer may rely on "other sufficient evidence", but that evidence must be as specific and detailed as to the elements of the expense as the "adequate records provision."

IRC section 274(c) provides rules for the substantiation of foreign travel. For travel outside the United States that is entirely in pursuit of a trade or business, the entire amount of expenses incurred are deductible. However, if a portion of travel is for nonbusiness activities, the taxpayer must allocate her/his travel expenses between personal nondeductible costs and deductible business expenses. No such allocation is required if less than 25 percent of the time spent outside the United States was for nonbusiness activities of the taxpayer.

IRC section 274(m)(3), effective for taxable years after 1993, disallows the deduction of travel expenses incurred with respect to a spouse, dependent, or other individual accompanying the taxpayer unless that individual is an employee of the taxpayer who is traveling for a bona fide business purpose, whose expenses would otherwise be deductible.

Note well that there are also special rules in IRC section 274(m)(1)(A) for luxury water transportation and under IRC section 274(h) for conventions or seminars held outside of North America or on a cruise ship.

7/25/2011