Business travel expenses can provide a freelancer with significant business expense deductions. However, deductible business expenses are subject to numerous rules which must be carefully followed, or you risk an unpleasant surprise if you are audited.
Let’s start with what qualifies as a business travel expense. The rules changed, temporarily, due to Covid and they will revert to the original IRS definition beginning January 1, 2023, for some business expenses. However, pre-Covid and post-Covid, business travel expenses must be ordinary and necessary expenses while traveling for your business, away from your tax home. This applies to you as a freelance business owner and your employees.
Business travel must take you away from your tax home for more than a typical workday. Keep in mind your tax home is the entire city or general area of your main place of business or where your work is located. For example, if you work in town and your home is in the suburbs, an overnight stay in town after a client dinner is not deductible. This overnight say is not considered ordinary and necessary from a tax law perspective, however, the client meal is deductible. Personal travel with a little business splashed in is not deductible.
Typical ordinary and necessary business travel expenses include:
- Transportation including airfare, taxi, bus, train, rental cars, and Uber/Lyft.
- Lodging including hotels, motels, VRBOs and Airbnb’s. Lodging at a family or friend’s home does not qualify as a business expense.
- Shipping and airline baggage fees that are incurred with the transportation of your suitcase and display materials.
- Rental cars or personal use cars. If you use your personal vehicle for transportation, you can deduct the business mileage at the standard milage rate. The 2022 standard milage rate was $0.585 until June 30, 2022, when it chanced to $0.625. If you rent a car the rental fees and gasoline are deductible. Whether you use your personal vehicle for rent a vehicle, parking and toll expenses are deductible.
- Dry cleaning and laundry while you are staying in a qualified lodging area.
- Business calls, such as long distance and fax machine fees.
- Tips paid to service providers while traveling.
- Meals that are non-entertainment related and consumed at a restaurant/bar/hotel. This is where the IRS provided temporary relief to help stimulate the economy and assist restaurants rebound post Covid. For tax years 2021 and 2022 meals are 100% deductible on your tax return. Pre 2021 and post 2022, meals are 100% deductible on your profit and loss statement, however, only 50% deducible on your persona/business tax return.
What about business entertainment? Business entertainment is not considered a deducible business expense. Entertainment expenses are typically not meal related expenses while entertaining a client. However, you can deduct the meal portion of a sporting event, concert, or any other entertainment related event, if you obtain a separate receipt for the meals portion of the event.
What happens if you bring your family along on your business travel? Family travel expenses are typically not deductible unless they are an owner or employee of the business. Additionally, if your employee is employed by the business, their travel must be for a bona fide business purpose. Non-employee, family travel expenses are not deductible, and their meal expenses do not qualify as a reasonable and necessary travel expenses.
Can you combine business travel with personal travel? Yes, however, there is a disclaimer. This is one area the IRS loves to scrutinize. You can deduct the transportation expenses to and from your business destination if the travel is primarily for business. All other travel related expenses must be allocated between personal and business and only the business expenses are deductible on your tax return.
Lastly, how about foreign travel? Is this deducible? Foreign travel is deducible to the extent it is required to conduct business. These expenses are scrutinized heavily by the IRS. As with any other business expense, especially foreign travel expenses, documentation is the key. Be sure to document the business purpose, clients whom you met with, topics of discussion and any deals closed and/or proposals presented. Should the IRS come knocking the burden of proof is on you the freelance business owner. In absence of sound documentation, the expenses claimed on your tax return could disallowed, resulting in increased taxable income, which means paying more in taxes.
Detailed recordkeeping is the key to credible travel deductions. In summary, play it safe, document, document, document. The business purpose of your travel is the starting point for substantiating any deductions and the time spent while traveling on business related activities is the key to the deductibility of business travel expenses.