Tracking Travel Expenses
Travel expenses are among the most common small-business tax deductions. They're also one of the biggest audit areas, for businesses big and small, in any structure. For that reason, it's critical that you keep good records of your expenditures; even better, maintain a log to keep track of all business travel costs. The most important fact to document in your log is the business purpose of the expense.
The rules for these deductions can seem confusing, because there are all sorts of gray areas. As long as you keep the basic IRS guidelines in mind, planning these business expenditures will be a snap. Here's the most important rule to remember: the expense has to be ordinary and necessary to your business in order to qualify for deductibility.
A freelance writer who works out of her basement and deals with clients only by phone and e-mail will have a hard time justifying a deduction for a three-week trip to Honolulu; on the other hand, that same trip may make total business sense for a sales rep whose territory covers the Hawaiian Islands. The second most important rule is documentation: if an expense is more than $75, you have to have receipts to back it up.
Business Travel Expenses
Travel can be one of the biggest expenses for new and small businesses. From trade shows to conventions to visiting client sites, entrepreneurs spend a lot of time on the road. As long as you follow the ground rules (and they're pretty vague), most of the expenses associated with your business travel will be deductible.
Here's a list of commonly deductible travel expenses (full deductibility depends on the actual circumstances):
Plane, train, cab, and bus fares
Half of the cost of your meals (when the trip is long enough to warrant eating out)
Baggage handling fees
Phone and fax charges
If you're going to be away from home for a while, you may want to consider using the standard meal allowance (SMA) instead of collecting a huge pile of receipts. The average SMA is $39 a day, half of which counts as a deductible expense. In more expensive cities, the SMA is higher, up to a maximum rate of $64 per day. You can find out the per diem rate for the cities you'll be traveling in by checking out IRS Publication 1542.
When your trip combines both business and personal expenses, it isn't fully deductible. If the trip is mainly for business purposes, you can still deduct the cost of getting to and from the destination. If it's mostly personal, none of that expense can be booked to the business; however, dedicated business expenses (such as a convention entrance fee) can still qualify.
Using Your Car for Business
When you use your own vehicle for company business, you can deduct some related expenses in your company books. To figure out the business portion of use, you have to keep track of your mileage in three separate ways: total, business use, and personal use.
When your home qualifies as your primary place of business, every time you leave the house for a business-related task counts as deductible travel expense. Whether you're heading out to make a bank deposit or going to visit a customer, you've got a business expense.
Business use includes driving between two business locations, even if one of them is your own main place of business. Those locations can be job sites, client offices, or task destinations (such as the post office). To track those miles, keep a log right in the car. For each trip, record the date, the business destination, the total mileage for that drive, and its business purpose.
Driving from home to your main business location doesn't count; that's considered commuting and it's not a business expense. However, if you make a legitimate business stop along the way, you can turn that nondeductible commute into a regular business expense.
Once you know your three mileage totals, you can easily calculate the business portion of your vehicle expenses. Simply divide your total dedicated business miles by your total mileage, then multiply that result by your total vehicle expenses. Those include everything from gas to repairs to insurance. Parking and tolls, though, don't get lumped in here; they count as stand-alone fully deductible business expenses. If you don't want to bother tracking expenses, you can just multiply your business miles by the current standard mileage rate.