1. Is a taxpayer entitled to deduct business travel expenses?
Generally, a taxpayer is entitled to deduct travel expenses when those expenses are incurred while the taxpayer is “away from home” for business reasons. This is the case even though those travel expenses would otherwise be personal expenses (such as food or lodging).
There are three basic requirements that must be met: The expense must be a reasonable and necessary traveling expense, it must be incurred while “away from home,” and it must be incurred “in the pursuit of business.
2. When is a taxpayer considered to be “away from home” for purposes of deducting business travel expenses? What if the taxpayer is away for an extended period of time for business reasons?
The IRS requires that a taxpayer be away from the company’s principal place of business, rather than a residence, in order to deduct business travel expenses. The IRS has ruled that a taxpayer’s tax “home” — meaning principal place of business — is not limited to a specific building or worksite, but instead encompasses the entire city or general area in which the business is located.
In cases where a taxpayer is required to take extended business trips, determining the location of a taxpayer’s primary place of business becomes difficult, though for most taxpayers, the determination is simple because many taxpayers maintain a residence in the general vicinity of their primary place of business. For taxpayers who are required to travel often for business, such extended business travel raises the question as to where that taxpayer’s tax “home” is located.
3. Can a taxpayer deduct business travel expenses if they travel so frequently that they have no “tax home”?
Yes. If a taxpayer travels constantly for business, it is possible that he or she may have no tax home for purposes of determining the deductibility of business travel expenses under Section 162.
4. Are business-related travel expenses deductible if a taxpayer resides in a location that is far from the taxpayer’s principal place of business?
A taxpayer is entitled to deduct business travel expenses but is not entitled to deduct the costs incurred in commuting between the taxpayer’s principal residence and place of business. When a taxpayer chooses to reside in a location that is far from the taxpayer’s principal place of business, the issue is not whether the taxpayer is “away from home” when traveling between a residence and place of business, but whether or not the travel expenses are sufficiently connected to a trade or business as to be deductible under Section 162.
5. Is a taxpayer entitled to a deduction for travel expenses when the taxpayer has multiple places of business?
If a taxpayer regularly conducts business in more than one location, a determination must be made as to which location is the “principal” place of business.
This determination must be made by examining all the facts and circumstances of the particular case, but the IRS has identified the following factors as important: The total time spent at each of the business locations; the degree of business activities conducted at each location; and whether the financial return in each location is significant or insignificant.
Though all three factors are important, the IRS generally considers the amount of time spent at each location to be the most important factor.
6. Can a taxpayer deduct travel expenses for a trip that has both business and personal elements? If the primary purpose behind a taxpayer’s trip is personal, no travel expense deductions for expenses incurred in traveling to and from the destination will be permitted even if the taxpayer does engage in some business activities during the trip.
However, if a trip has both business and personal elements, the taxpayer may deduct those expenses that are properly allocated to the business portion of the trip even if unable to deduct the expense of traveling to and from the destination because it is found that the trip was primarily undertaken for personal reasons.
7. Can an employer deduct moving expenses for which it reimburses its employees? Are reimbursed moving expenses included in the taxpayer-employee’s gross income?
The 2017 tax act suspended the ability of taxpayers to deduct moving expenses under IRC Section 217 for 2018-2025. Although the Section 132 employer deduction for moving expenses is also suspended through 2025, an exception exists for members of the armed forces (and their spouses and dependents) who are on active duty.
Prior to 2018, generally, if an employer reimbursed an employee for business-related moving expenses, that employer was entitled to deduct the reimbursed amount as an ordinary and necessary business expense under IRC Section 162.
8. Is a taxpayer entitled to claim a deduction for business-related education expenses?
An employee is generally entitled to deduct education-related expenses that meet the following requirements: The expense must relate to education that is designed to maintain or improve skills used by the taxpayer in his or her trade or business; or the education must be specifically required by the employer, or under applicable law or regulations, in order for the taxpayer to retain an established employment relationship, status or compensation level.
9. When is a business-related entertainment or meal expense “ordinary and necessary” so that it may be deducted?
The 50% deduction for meal expenses remains in effect (including meals consumed while travelling for business). The 2017 tax act also expanded the 50% deduction for meals to include expenses associated with providing meals through an eating facility meeting de minimis fringe benefit requirements. The deduction for meals provided at the convenience of the employer expires after Dec. 31, 2025.
Under the Consolidated Appropriations Act of 2021, business meals provided by a restaurant are 100% deductible in tax years 2021 and 2022 under certain conditions.
10. What limitations apply to prevent a taxpayer from deducting lavish or extravagant business-related entertainment expenses?
Under the 2017 tax act, the previously existing 50% deduction for entertainment expenses that are directly connected with a business activity is suspended for 2018-2025. This applies to any activity considered entertainment, recreation or amusement, including membership dues with respect to any club organized for business, pleasure, recreational or social purposes.
11. When is a taxpayer entitled to deduct expenses incurred in maintaining a home office?
The 2020 CARES Act did not change the rules governing the home office deduction. While more employees are currently working from home because of the coronavirus pandemic, the business expense deduction for home office expenses of employees remains suspended under the 2017 tax reform legislation’s suspension of all miscellaneous itemized deductions.
A deduction for use of a part of the taxpayer’s residence as an office will not be allowed unless a portion of the dwelling is used exclusively and on a regular basis as (a) the principal place of business for any trade or business of the taxpayer; or (b) the place of business used by the taxpayer for meeting patients, clients or customers in the normal course of the taxpayer’s business.
12. How does an employer’s reimbursement or failure to reimburse an employee’s expenses impact a taxpayer’s business expense deductions?
The tax treatment of an employee’s business expenses depends on whether the employee is reimbursed for them by the employer. The IRC provides that expenses paid or incurred by the taxpayer, in connection with the performance of services as an employee, under a reimbursement or other expense allowance arrangement with the employer are deductible in full from gross income, to arrive at adjusted gross income, so long as the expenses otherwise qualify as business expense deductions. Generally, this deduction will be available only to the extent that the reimbursement is includable in the employee’s gross income.