Self-Employed? Here’s How to Deduct Travel Expenses
When you’re the boss, it’s okay to mix business with pleasure when it comes to travel. As business travel re-emerges, learn about how deducting travel expenses can help you save more on your tax bill.
Depending on the nature of your business you may need to travel to meet with clients, perform services, or attend conferences. It’s important to understand which travel expenses are deductible and how to claim them as an allowable business expense.
What are business-related travel expenses?
The IRS defines travel expenses as “ordinary and necessary expenses for traveling away from home for your business, profession, or job.” Any travel must serve a business purpose. If you mix business and personal you must be able to allocate the time and costs between the two and separate any personal expenses. To deduct meals and lodging, it must involve being away from your business home overnight. Your business home is your place of business, which may not be the same place that you live.
Which travel expenses are deductible?
Deductible travel expenses include the actual cost of travel, transportation, lodging, business meals, dry cleaning or laundry services, business communications and incidentals. The list of deductible expenses includes:
- Travel – airfare, bus fair, train fare
- Transportation – rental car, taxi, Uber/Lyft, parking fees, tolls
- Lodging – hotel, inn, Airbnb, VRBO, HomeAway
- Meals – must be non-entertainment-related and generally only 50% of the cost is deductible. For 2021 and 2022 tax years, the IRS is allowing 100% deduction of business-related meals provided by a restaurant
- Dry Cleaning or Laundry
- Business Communications – phone calls, faxed transmissions, internet
- Incidentals – shipping of baggage, computer rental fees, conference room rental costs, tips
Keeping accurate records is important. Tax law requires records to substantiate the business purpose and associated costs. You must be able to prove the total amount claimed with a receipt or bank statement. An airline ticket or hotel receipt can validate the time and place of travel. Noting the names of the clients you met with, and the outcome of the meeting substantiates the business purpose. It may be helpful to maintain a logbook, calendar, or work diary to track business travel, associated expenses, and client meeting notes.
How do you use your Business Accountable Plan for reimbursements?
As an employee of your own S-Corp, you will submit all business-related travel expenses to the business for reimbursement through a Business Accountable Plan (BAP). A BAP is a plan that allows you to reimburse workers for business expenses that they paid for out-of-pocket. These reimbursements are tax-free and are not subject to withholding taxes or W-2 reporting.
There are four requirements for an S-Corp to make reimbursements through a BAP:
- The expenses must be business related
- Adequate documentation of the expenses must exist
- The request for reimbursement must be made in a reasonable and timely manner
- The employee must return any excess monies to the employer promptly
Using a BAP passes the employee shareholder’s business-related expenses to the business. These expenses are then deducted on the corporate tax return. Be aware that if the IRS determines your BAP did not meet the requirements of an accountable plan, they can deem your plan as non-accountable. Reimbursements under a non-accountable plan are income to the employee and included as wages, subject to payroll tax withholdings. The increase in wages is an allowed business expense, as are the increased payroll taxes. However, the business cannot deduct any of the travel expenses.
Your Formations success team can help you set up a Business Accountable Plan that meets IRS requirements. We offer guidance as to the deductibility of travel expenses, manage the company-to-employee reimbursements, and ensure that business-related travel expenses are accounted for correctly.
Not a Formations customer yet? We can help get you track and deduct travel expenses right from the start.