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To Deduct or Not to Deduct…That is the Question

As published in the July 2008 issue of The Greater Lansing Business Monthly.

Fuel costs have increased the cost of travel. Accordingly, the tax treatment of expenditures can have increased importance on the net cost. Ordinary and necessary travel expenses incurred during the course of doing business are deductible, but determining which expenses qualify for deductions can prove to be challenging. Applying a few simple principles can assist you in clarifying a somewhat foggy subject.

While away from home overnight, tax deductible expenses include travel by airplane, train, bus, or car between your home and your business destination. (Travel from your home to a regular business location that does not involve an overnight stay, are not deductible.) The use of your personal car as well as taxis and other types of transportation can be deductible, along with meals (subject to certain limitations), lodging, and the tips you pay for services related to these expenses. Expenses that are lavish or extravagant will be deemed non-deductible expenses. While traveling business related items such as dry cleaning, phone calls and computer rentals are deductible; however, personal entertainment expenses are not. Expenses incurred at home as a result of taking the trip, such as pet boarding expenses, are not deductible.

The cost of domestic travel to and from the business destination is fully deductible if the trip is primarily for business. On the other hand if the trip is primarily for personal purposes, none of the travel expenses to and from the destination are deductible. There are additional restrictions on foreign travel expenses. Expenses while at the destination, which are allocable to the taxpayer’s trade or business, are deductible even if travel expenses to and from the destination are not deductible. If the taxpayer engages in business activities on side trips or while at the destination, the expenses allocable to business activities can be deducted. In cases where commercial flights are unavailable or unable to meet legitimate business needs, the expenses of private aircraft and the pilots who fly them can be considered ordinary, necessary and reasonable as business expenses and therefore deductible.

To determine if a trip or expense is primarily for business or personal reasons, consider the time spent on business as compared with that spent on personal activities. Expenses for conventions, seminars, and trips are scrutinized by the IRS to determine if they are valid business deductions or if the trips are truly vacations in disguise. Where the business activity is less than a principal part of the convention or seminar, deductions for these trips will be questioned. Evidence supporting the portion of travel expenses that are properly allocable to business will be required. Deductions for such expenses will not be allowed if supporting evidence is not provided.

Thinking of bringing someone along on your next trip? Keep in mind that no income tax deductions are allowable for travel expenses paid or incurred by a spouse, dependent, or other individual accompanying a taxpayer on a business trip unless they are an employee, are traveling for a bona fide business purpose, and the expenses would otherwise be deductible.

Expenses incurred in connection with providing services to a charity are deductible for those who itemize. The services must primarily benefit the charity and not the taxpayer or other individuals. If there is a significant aspect of personal pleasure to the travel, the costs are not deductible. Travel costs, meals, and lodging expenses are deductible where the taxpayer is attending for the benefit of the charity. These deductions are also closely monitored by the IRS for appropriateness.

When in doubt, consult with your tax advisor for more information. It is in every company’s best interest to carefully track all expenses incurred during the normal course of doing business as they ultimately impact the bottom line.

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