This letter is in response to your questions regarding the general rules for deducting business travel expenses.
In order for a travel expense to be deductible, it must be reasonable and necessary,
incurred while away from home, and in the pursuit of business. Travel expenses include
transportation, lodging, a portion of the cost of meals, and similar costs incurred while
away from home. The phrase "away from home" has been interpreted to require a
taxpayer to travel overnight, or long enough to require sleep or rest. Working overtime or
at a great distance from your residence is not enough to justify deducting travel expenses
if you return home without stopping for sleep or rest. You are generally considered to be
away from home when you are away from your principal place of business. The overnight stay
must be for a business reason and not merely for convenience. The overnight rule does not
literally require you to be away from home for an entire night or day, but it does require
a substantial break for sleep or rest rather than a mere pause in the work day.
Since the IRS only permits you to deduct expenses while away from your tax home,
identifying your tax home is critical. Although there is some disagreement among the IRS
and the various courts, generally your tax home is your principal place of business, and
you may deduct travel expenses while temporarily away from that home in the pursuit of
business.
If you are temporarily employed at a distant site, you may deduct the cost of meals and
lodging while at the temporary job site because you are "away from home." You
will not be treated as being temporarily employed away from home if that assignment lasts
more than one year (except for certain federal employees engaged in criminal
investigations or prosecutions, or providing support for such investigation or
prosecution). However, if you are employed for an indefinite or uncertain time at a
distant work site, you cannot deduct living expenses at the distant job site even if it is
inconvenient to move to the new location. In order to justify a deduction for living
expenses while away from home at a distant job site, you must establish that: (1) the new
job is temporary, (2) you maintain a residence in the vicinity of your principal business,
(3) you incur additional living expenses while away from home, and (4) the travel is for
business rather than personal reasons.
Transportation expenses incurred to travel between two jobs, whether multiple work
sites or employers are involved, generally are deductible. Overnight meals and lodging
costs are deductible only if you travel to or from a secondary business location. Travel
expenses to the secondary job are deductible so long as the expenses are properly
attributable to your presence there in the actual performance of your job. The IRS
distinguishes between a taxpayer's major and minor business locations based on the facts
and circumstances of each case, and the expenses incurred in traveling to and from the
minor job site are deductible. The IRS considers the following factors to be the most
important in identifying which post is major or minor: (1) the total time spent at each
post, (2) the degree of your business activity in each area, and (3) the proportion of
business and income generated at each business site. The first factor is the most
significant.
The IRS has ruled that a taxpayer without a principal place of business has a tax home
at his personal residence if it is a "regular place of abode in a real and
substantial sense." This ruling is important for traveling salesmen who often have no
permanent place of business. The reason for this ruling is that a taxpayer with a
permanent residence incurs travel expenses that duplicate expenses to maintain his home
that he would not incur but for the business exigencies. The IRS has stated three factors
it considers in evaluating a taxpayer's claim of permanent residence: (1) whether the
taxpayer performs some of his business in the vicinity of his claimed residence and uses
it while performing the business there, (2) whether the taxpayer's living expenses are
duplicated because business requires him to be away from his claimed abode, and (3)
whether the taxpayer has not abandoned the vicinity of his claimed abode, has family
members living there, or uses the claimed abode frequently for lodging. A taxpayer
satisfying all three tests can treat his residence as his tax home and can deduct travel
expenses while away from the home. If only two tests can be met, the case is subject to a
facts and circumstances evaluation of the tax home. If only one test can be met, he is
considered an itinerant whose tax home is wherever he is working and, therefore, he cannot
deduct any business travel expenses.
In addition to satisfying the above tests, IRS regulations require taxpayers to
substantiate their travel expenses. In general, taxpayers must maintain documentary
evidence (such as receipts) for all lodging expenses and, effective for expenses incurred
after October 1, 1995, all travel expenses of $75 or more.
I hope you have found this information helpful in explaining the complex rules relating to business travel and transportation expenses. If you have any questions, please feel free to call me.
Bob Parrish CPA