The IRS recently updated its procedures for taxpayers deducting travel expenses related to business and investment income, including sole proprietors. Some of the per diem rates are a little higher than last year, which might help frugal business owners who need to travel away from home for business purposes.
Generally, business owners can deduct the cost of traveling away from home on a business trip. This includes the cost of transportation, lodging, meals and incidental expenses. Meals and entertainment expenses are subject to a 50 percent limitation, meaning you can only deduct half the costs of these items. Some (but not all) of the same deductions are allowed for travel related to investments.
Following are some tips about deducting business travel, including updates from the new revenue procedure. Also included are some points about deducting the cost of travel in pursuit of income, for example to check out an investment opportunity.
- If you do business in more than one location, you need to declare one of them to be your “tax home” in order to deduct travel between them. When you travel away from your tax home and stay overnight, you can take the deduction for all your expenses. If you don’t stay overnight, only your travel costs can be deducted, but not your meals.
- If you combine business and pleasure in the same trip, you can only deduct the portion of your travel expenses attributable to business. If you take your spouse or life-partner, you can deduct only the cost of your own travel and meals—unless your spouse/partner also works regularly in your business and you can demonstrate a business purpose for him/her to accompany you. If you take the kids, too, the IRS considers it a family vacation, and you can only deduct costs that were actually associated with the business purpose of your trip.
- If you are traveling to explore a specific investment opportunity and you make the investment, your travel expenses are not deductible; they are added to the basis of the investment. However, if you made the trip intending to acquire a specific business or property but were unsuccessful in making the acquisition, your travel expenses are deductible as a loss. No deduction is allowed for travel in a general investigation or search for new business or investment opportunities.
- You can deduct travel costs related to setting up a new business as long as the trade or business you are in is the same as you engaged in previously, as someone else’s employee. For example, if you work for a management consulting firm and decide to go out on your own, travel costs incurred while setting up your new business are deductible. However, if you’ve been out of work for more than a year, the IRS considers this “seeking new employment” rather than continuation of your old trade or business, and thus the costs are not deductible. (For other tips about deducting business start-up costs, click here .)
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