What are the business travel federal income tax rules ?

Consider this story (if you’re not a LOST fan, bear with me–don’t worry, there’s no LOST spoiler here!): 

Hurley was the owner of Mr. Cluck’s Fried Chicken.  His business was exploring the possibility of expanding to Australia, so Hurley boarded Oceanic Flight 815 and went to Australia for 3 weeks to meet a potential investor.  While there, Hurley spent 2 weeks sight-seeing and partying.  He spend only one week there meeting with clients. 

 Hurley also brought his employee, Charlie, with him, but paid half of Charlie’s plane ticket, since he couldn’t get any discount travel deals.  Charlie only came for the business meeting and did not spend any personal time in Australia.  

So what are the federal income tax rules governing the business travel deductions Hurley and Charlie can take?  

The basic federal income tax rule for business travel deductions is this:

You can deduct ordinary and necessary expenses of traveling away from home for your business, profession, or job.

Here are five things Hurley and Charlie need to know about the federal income tax rules governing business travel deductions:

  1. The business travel expenses must be substantiated.  This means that any expenses must be well documented, in order to prove that they are, in fact, business expesnes.  Therefore, if Hurley had a business lunch with a potential investor, it may be deductible if he substantiates it, ie, if he documents it well. A good way of doing this is to keep a journal with the name and date of the business meeting.  It’s a good idea to keep receipts, too, such as credit card receipts or any other receipts.
  2. Keep track of the business related tax expenses and separate them from the personal items. Hurley can’t necessarily deduct his personal expenses in the business trip, since most of his trip was for pleasure, so he needs to be sure not to intermingle those expenses with the business travel expenses.   
  3. Make sure the expenses are “ordinary” and “necessary” business expenses.  For example, I worked on a case before the IRS where they contested a working mother’s use of a baby car seat for her business trip to Hawaii.  Even though, in essence, the expense was necessary for her, it may not have been “ordinary and necessary” under the IRS viewpoint.  Of course, check with your tax advisor if you feel that it’s really a necessary business expense, since there are many things that can be allowed as a business expense.   
  4. There is a deduction for employees on business travel.  Charlie needs to keep track of how much Hurley reimbursed him. He may be able to take a deduction on the unreimbursed business travel expenses.  He will, however, be limited to the amount of deduction he can take, based on his Adjusted Gross Income. 


Ask a Tax Advisor. Get an Answer ASAP.

Related Resources