Business travel expenses are deductible. These are expenses for business trips and work trips, such as car and truck expenses, airfare and hotels and lodging. It can also include travel meals.
Those looking to deduct business trip expenses are running a risk as the IRS frequently disallows these expenses on audit. It does so even if the taxpayer maintains detailed bank statements and credit card statements that detail the date, amount and location of the expenses. It may even disallow these expenses when the taxpayer has actual receipts for their travel expenses.
Disallowance by the IRS is the rule and not the exception. This is a common dispute that arises on audit by the IRS.
This can leave you wondering whether travel expenses are actually deductible. You may also be wondering whether you can claim travel expenses without receipts?
The answers are “yes” and “yes,” sometimes they are deductible and sometimes even if you do not have receipts. The Nelson v. Commissioner, Docket No. 892-19 (2022) provides an example. The IRS denied the taxpayer’s travel expenses in Nelson, but the tax court allowed them. This case is an example that helps illustrate when these expenses are deductible.
About Nelson v. Commissioner
The facts in the Nelson are fairly typical for travel expenses. Let’s use those facts to consider travel expenses.
The taxpayer in Nelson was employed by a company that manufactured skin creams. The business had its principal business operations in Washington D.C. and is owned by the taxpayer’s uncle.
The taxpayer performed his job duties in Washington D.C. and in Dallas, Texas. He oversaw production in Washington D.C., and bottling in Dallas, Texas.
The taxpayer lived in Maryland with his girlfriend. He also rented an extended stay hotel room in Dallas. He paid for the Dallas hotel room for extended periods to take advantage of a reduced nightly rate.
The court described the unreimbursed travel expenses as follows:
Mr. Nelson incurred expenses of $18,709 for lodging in Dallas, $4,910 for air travel to Dallas and from Dallas to Washington, D.C., and $6,207 for car rentals in Dallas.
The IRS conducted an audit and disallowed the taxpayer’s travel expenses. It did not believe that the expenses were for business trips.
The taxpayer filed a petition to ask the U.S. Tax Court allow his business trip travel expenses.
Tax Deductions for Business Trip Expenses
The Tax Cuts & Jobs Act (“TCJA”) of 2017 eliminated the deduction for unreimbursed employee expenses, including business trip travel expenses (it also impacted entertainment expenses).
The impact of this change by the TCJA can be negated if the employer reimburses the employee’s business trip expenses. If the employer has adopted an accountable plan for these expenses, the employer’s reimbursement for the business trip expenses is not considered income to the employee. And the employer can deduct the expenses as ordinary and necessary business expenses.
The same concepts that applied to employees before the TJCA, such as the taxpayer in Nelson as the dispute involved the 2014 tax year, still apply to self-employed workers who deduct business travel expenses. Self-employed workers are still able to deduct their travel expenses. This includes contractors as they are considered to be self-employed.
These self-employed workers usually report their travel expenses on Form 1040, Schedule C. They may also be reported on the taxpayer’s business tax return if they operate using a legal entity, such as a LLC taxed as an S corporation.
How to Identify Business Travel Expenses
The first step in determining whether the business trip expenses are deductible is to determine where the taxpayer’s tax home is. The tax home generally means the principal place of business. IRS Publication Publication 463, Travel, Gift, and Car Expenses, provides the following example:
You live in Cincinnati where you have a seasonal job for 8 months each year and earn $40,000. You work the other 4 months in Miami, also at a seasonal job, and earn $15,000. Cincinnati is your main place of work because you spend most of your time there and earn most of your income there.
It goes on to provides the following factors that help establish where your tax home is if you do not have a primary place of business:
- You perform part of your business in the area of your main home and use that home for lodging while doing business in the area.
- You have living expenses at your main home that you duplicate because your business requires you to be away from that home.
- You haven’t abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or you often use that home for lodging.
The second step is to determine what business trips are eligible. Generally, travel to and from a tax home and a residence is not deductible. These expenses are considered personal commuting expenses. The deduction is limited to business trips.
The third step is to identify the expenses associated with the qualifying business trips. Travel expenses usually include mileage, air transportation, lodging (such as costs for a hotel room), and related expenses. It can even include rental car costs. Yes, the costs for rental cars are tax deductible.
Are Receipts for Travel Expenses Required?
This brings us back to the question in the Nelson case. The question is what substantiation is required to document travel expenses?
The general rule is that travel expenses have to be separated into three categories or buckets: (1) meals and lodging, (2) vehicle expenses, and (3) everything else.
The first category for meals and lodging are subject to higher substantiation requirements. Section 274(d)(1) says that meals and lodging while away from home have to be substantiated by adequate records or by sufficient evidence corroborating the taxpayer’s own statement:
- The amount of the expense or other item;
- The time and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift;
- The business purpose of the expense or other item; and
- The business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift.
We’ll come back to these requirements in the next section. Suffice it to say that the IRS requires that the primary purpose of the trip be for business purposes and that records are kept to establish the business purpose.
It should also be noted that meals are subject to a 50 percent exception. This exception only allows you to deduct 50 percent of the costs of the meal.
The second category, vehicle expenses, can overlap with the first category. Any vehicle expense requires a mileage log. This is true even if the vehicle expense is for the use of a car and you use actual cost rather than mileage to compute the tax deduction (the rule is that you can deduct the actual cost or mileage times a standard mileage rate; the deduction is usually larger if mileage rather than actual costs are used). No mileage log, no deduction when it comes to these expenses. Note: there is an exception for qualified nonpersonal use vehicles).
The third category includes everything else. Examples include parking fees, dry cleaning, baggage and shipping, cleaning, telephone, tips, computer rental fees, etc. These expenses are not subject to the limitations above.
Can Bank and Credit Card Statements Suffice?
Most travel expenses are subject to the higher substantiation retirement in Section 274(d) noted above. The IRS is quick to cite this rule on audit. It cites the rule to disallow travel expenses.
Taxpayers who have their travel expenses often wonder what type of records would ever suffice. The Nelson case provides the answer. In Nelson, the taxpayer presented the following records:
Mr. Nelson offers receipts (Ex. 3-P), his annotated bank and credit card statements for 2014 (Exs. 6-P, 7-P, & 8-P), and his testimony and detailed categorization (Ex. 5-P) regarding business purpose.
The IRS did not accept these records. Presumably the IRS Office of Appeals also did not accept the records.
The U.S. Tax Court did accept them:
Mr. Nelson’s receipts, bank statements, and credit card statements substantiate the time and place of each amount and are sufficiently specific to corroborate his credible testimony regarding their respective business purpose. The exhibits show the names and locations of hotels used for lodging, and the names of passengers as well as the departure and destination cities for flights. The dates of the charges for flights correspond approximately to the dates of hotel and other charges on Mr. Nelson’s statements to corroborate his being in the destination cities. We will allow deductions for business travel expenses that are verifiable from Mr. Nelson’s exhibits….
This confirms that bank and credit card statements are generally sufficient if coupled with credible testimony.
The courts have also considered repetitive travel. The repetitive nature of the trips to impose a lesser record keeping requirement, as in this court case.
Taxpayers whose travel expense deductions are denied by the IRS on audit should read the Nelson case and be ready to cite it to the IRS auditor. The IRS is not likely to agree with the position, as its normal practice is to simply disallow travel expenses.
The Nelson case should then be raised with the IRS Office of Appeals. Generally, IRS Appeals is more likely to accept the substantiation than the IRS audit function.