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Deducting Business Travel Expenses

By Peter Jason Riley

NOTE: The 2017 TCJA eliminated all deductions for employee related expenses.

In order for a travel expense (as opposed to transportation expense) to be deductible, it must be reasonable and necessary, incurred while away from home, and in the pursuit of business. Travel expenses include transportation, lodging, a portion of the cost of meals, and similar costs incurred while away from home. The phrase "away from home" has been interpreted to require a taxpayer to travel overnight, or long enough to require sleep or rest. Working overtime or at a great distance from your residence is not enough to justify deducting travel expenses if you return home without stopping for sleep or rest. You are generally considered to be away from home when you are away from your principal place of business. The overnight stay must be for a business reason and not merely for convenience. The overnight rule does not literally require you to be away from home for an entire night or day, but it does require a substantial break for sleep or rest rather than a mere pause in the work day.

Since the IRS only permits you to deduct expenses while away from your tax home, identifying your tax home is critical. Although there is some disagreement among the IRS and the various courts, generally your tax home is your principal place of business, and you may deduct travel expenses while temporarily away from that home in the pursuit of business.

If you are temporarily employed at a distant site, you may deduct the cost of meals and lodging while at the temporary job site because you are "away from home." You will not be treated as being temporarily employed away from home if that assignment lasts more than one year (except for certain federal employees engaged in criminal investigations or prosecutions, or providing support for such investigation or prosecution). However, if you are employed for an indefinite or uncertain time at a distant work site, you cannot deduct living expenses at the distant job site even if it is inconvenient to move to the new location. In order to justify a deduction for living expenses while away from home at a distant job site, you must establish that: (1) the new job is temporary, (2) you maintain a residence in the vicinity of your principal business, (3) you incur additional living expenses while away from home, and (4) the travel is for business rather than personal reasons.

Transportation expenses incurred to travel between two jobs, whether multiple work sites or employers are involved, generally are deductible. Overnight meals and lodging costs are deductible only if you travel to or from a secondary business location. Travel expenses to the secondary job are deductible so long as the expenses are properly attributable to your presence there in the actual performance of your job. The IRS distinguishes between a taxpayer's major and minor business locations based on the facts and circumstances of each case, and the expenses incurred in traveling to and from the minor job site are deductible. The IRS considers the following factors to be the most important in identifying which post is major or minor: (1) the total time spent at each post, (2) the degree of your business activity in each area, and (3) the proportion of business and income generated at each business site. The first factor is the most significant.

The IRS has ruled that a taxpayer without a principal place of business has a tax home at his personal residence if it is a "regular place of abode in a real and substantial sense." This ruling is important for traveling salesmen who often have no permanent place of business. The reason for this ruling is that a taxpayer with a permanent residence incurs travel expenses that duplicate expenses to maintain his home that he would not incur but for the business exigencies. The IRS has stated three factors it considers in evaluating a taxpayer's claim of permanent residence: (1) whether the taxpayer performs some of his business in the vicinity of his claimed residence and uses it while performing the business there, (2) whether the taxpayer's living expenses are duplicated because business requires him to be away from his claimed abode, and (3) whether the taxpayer has not abandoned the vicinity of his claimed abode, has family members living there, or uses the claimed abode frequently for lodging. A taxpayer satisfying all three tests can treat his residence as his tax home and can deduct travel expenses while away from the home. If only two tests can be met, the case is subject to a facts and circumstances evaluation of the tax home. If only one test can be met, he is considered an itinerant whose tax home is wherever he is working and, therefore, he cannot deduct any business travel expenses.

In addition to satisfying the above tests, IRS regulations require taxpayers to substantiate their travel expenses. In general, taxpayers must maintain documentary evidence (such as receipts) for all lodging expenses and, all travel expenses of $75 or more.

Business Travel Factsheet