Understanding Travel Deductions for Small Business Taxes

by | Mar 29, 2023 | Taxes

It is not uncommon for small business owners, especially those in service-based businesses, to have to travel often for work purposes. During their travels, these businessmen and women will incur expenses that can – and should – be deducted for tax savings. Therefore, understanding travel deductions for small business taxes is crucial to their bottom line during planning for 2023 taxes.

 

The extent to which you travel and the amount of expenses that are acquired do not necessarily influence the type of travel deductions that can be made. The IRS lists certain guidelines to assist small business owners and entrepreneurs in identifying what can be written off and under what parameters.

 

Understanding the guidelines set by the IRS will not only make planning your business trips easier, but financially wise as well. In this article, we will go into detail about understanding travel deductions for small business taxes.

 

What is Business Travel?

 

The IRS considers any trip that is mostly business to a destination far away from your “tax home” with ordinary and necessary expenses as “business travel.” The length of time is another factor to acknowledge. The trip must be far enough away from your tax home to require the need for sleep or rest. 

 

Combining business and pleasure in a trip is allowed, provided that less than 25% of the trip is for pleasure. The amount of time spent on personal activities will be weighed against the business or work related activities to determine if your deductions are applicable to business travel expenses when filing 2023 taxes.

 

Another notable point is foreign business travel. The IRS carefully analyzes business expenses that take place outside of the small business owner’s home country. Due to the high possibility of individuals taking a vacation under the pretense of a business trip, small business owners must document all of their expenses when traveling abroad for work purposes. Save your receipts! 

 

What are Travel Expenses?

 

Travel expenses that are deductible, according to the IRS, can include the following:

  • Airplane, train, or bus tickets between your home and your business destination
  • Mileage in your car between your home and your business-related travel destination 
  • Using your personal vehicle for business purposes
  • Taxi fares, Ubers, Lyfts, or other types of similar transportation between an airport or train station to a hotel, or from a hotel to a business destination
  • Accommodations and meals while traveling
  • Business calls
  • Laundry and dry cleaning
  • Shipping displays or sample products to/from business locations
  • Tips paid for services pertaining to any of the above listed expenses

 

In understanding travel deductions for small business taxes, especially service-based businesses, it is important to note that you cannot deduct expenses if they are extravagant or lavish. They must be reasonable, considering the circumstances and facts. However, the IRS will not penalize you if you fly first class or dine with a client at a pricey restaurant.

 

What are the Limitations?

 

There are certain conditions to note when examining business travel expenses that could be deductible. When filing 2023 taxes, understanding travel deductions for small business taxes can significantly assist in what you could potentially owe the IRS. Every expense cannot be deducted and some deductible expenses have constraints.

 

Meals

Meal costs are a prime example of this. If a small business owner has a meal at a restaurant alone, they can deduct the entire cost. If they dine with a client at a restaurant, they are only allowed to deduct 50% of the cost. Alternatively, if they purchase groceries, they can only deduct 50% of that cost.

 

Hotels

Comparably, when a small business owner has to stay in a hotel for travel purposes, the room charge and taxes are deductible. However, extra charges, such as the use of the fitness center or game and movie rentals, are not deductible. 

 

Traveling with Family

Traveling with your spouse or child is another intricate situation when understanding travel deductions for small business taxes. The costs incurred when you bring along your spouse or child on a business trip can be deductible but only if they are an employee or have a legitimate business purpose for accompanying you. If they do not have anything to do with your travel purpose or your business – sorry, their expenses are not deductible. 

 

The Quick Checklist to See if Your Trip is Considered Business Travel

 

The general rules that the IRS has set for deducting business travel expenses are:

  1. You must be working regular hours – around 8 hours per day – conducting specifically business-related activities.
  2. Your destination must be at least 100 miles away from your tax home. 
  3. The trip should last less than one year. (If you have been in one destination for longer than one year, you are considered to be living there!)

 

Summary

 

Small business owners, especially service-based businesses, must remain informed about their business travel expenses that are deemed deductible. Following the guidelines and rules set by the IRS is fundamental in determining which expenses incurred during business trips can be deducted while filing 2023 taxes. 

 

Understanding what business travel is, which expenses and charges can be deducted, and the limitations on these deductions can be essential in saving during tax season and avoiding penalties from the IRS.

 

For more information on understanding travel deductions for small business taxes, contact us by clicking the link below.