The tax rules surrounding travel expenses can be confusing. The confusion increases in a business environment that has a traveling sales team and part-time or full-time remote workers.
Below is a summary of key definitions and an overview of the nuances that may exist under certain work arrangements.
When are business travel expenses deductible?
Business travel expenses can be deducted when an employee must travel away from their tax home or main place of work for business purposes. The expense must be ordinary and necessary and not extravagant or personal in nature.
What is a tax home?
In general, an employee’s tax home is their regular place of business, not their personal residence. The term tax home can include the general area where the individual's work or business is located.
If the individual has more than one regular place of business, their tax home is their main place of business or work. An individual's main place of business or work is determined by 1) the total time the employee ordinarily spends in each place, 2) the level of business activity in each place, and 3) how much money the employee earns at each place.
A tax home may change under the following circumstances:
- Indefinite work assignments. If an employee is given an indefinite work assignment at a different location, the worker's tax home changes to the new work location. In this situation, the employer can't deduct the employee's expenses as business travel expenses while they are working at the new location because the employee isn't traveling away from their tax home. Additionally, any amounts an employee receives for living expenses for their new tax home must be included in their taxable compensation.
- Full-time remote work assignments.
- If an employee is hired as a full-time remote worker, but their tax home is concluded to be the employer location per their employment contract, any amount an employee receives for commuting to or from the employer location is taxable compensation to the employee.
- If an employee is hired as a full-time remote worker and their tax home is the employee’s home per the employment agreement, then employer-paid travel between the employee’s home and the employer’s office is tax-free to the employee and deductible by the employer as a business travel expense.
- Hybrid and part-time remote work assignments. These situations become a bit more complex and require a facts and circumstances approach. If the employment agreement is silent, all factors should be taken into account including, but not limited to, the number of days in the office and workstation assignment of the employee while in the office.
Which business travel expenses are deductible?
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
- Rental cars
- 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 and tips paid for services related to any of these expenses
- Other similar ordinary and necessary expenses related to the business travel
- Conventions, seminars, and meetings, including the above related expenses as well as the cost of the event
Documentation is key
Each business travel expense should be substantiated by the business purpose, the date and time of the travel, and the amount of the expense. Receipts should be retained as they will likely be requested upon a federal or state tax examination. Businesses should require each employee to abide by a standard practice wherein the above is satisfied on a contemporaneous basis.
If you have questions about determining when certain expenses are deductible, please contact any member of our Tax Strategies group.
Brian D. Kitchen is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.
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