Are you a small business owner or freelancer? You may be surprised by how many of your business expenses are considered tax-deductible. As you get ready to file your 2020 tax return, you’ll want to take advantage of every deduction available to you. Over the coming weeks, we will be breaking down tax-deductible business expenses in a multi-part blog series.
Welcome to Part I: Transportation, Travel, & Meals.
In order to deduct a business expense, it must be both ordinary and necessary. As defined by the IRS:
Ordinary expenses are those considered "common and accepted" in your field of business.”
Necessary expenses are defined as "helpful and appropriate for your business.” An expense can be deemed necessary even if it is not considered indispensable.
Local Transportation Expenses
Do you use your car or truck for purposes related to your business? You may be eligible to deduct the costs of operating and maintaining your vehicle. Other costs associated with local transportation and business travel may also be tax-deductible.
Local transportation expenses include costs incurred in the following scenarios:
Getting from one workplace to another in the course of your business or profession.
Visiting clients or customers.
Going to a business meeting away from your regular workplace.
Traveling from your home to a temporary workplace outside of your regular place(s) of work.
Note that you cannot deduct the costs of driving your vehicle between your home and your main workplace as a business expense; these are considered personal commuting expenses. However, If your home qualifies as your principal place of business, you may be able to deduct round-trip costs of traveling from your home to clients or customers.
Scenario 1: Traveling Music Instructor
Perhaps you are a traveling music instructor. Rather than teaching from a single location, you travel to each student’s house for in-home lessons. You may deduct the transportation costs incurred from driving to and from your students’ homes.
Scenario 2: Music Instructor With a Home Studio
Instead of traveling to every student, you teach music lessons from your home. Though most of your students take lessons at your home studio, an elderly student is unable to drive, so you travel to her home instead. You may deduct the transportation costs of traveling between her home and yours.
Scenario 3: Music Instructor at a Separate Location
Rather than traveling to and from students’ homes or teaching from your own home, you rent out a separate studio space to use as your main workplace. You may not deduct transportation expenses incurred traveling between your home and studio. However, if a few students opt for in-home lessons rather than coming to you, you may deduct the costs of traveling between your studio and those students’ homes.
Methods for Deducting Car & Truck Expenses
For business-related local transportation or overnight travel expenses, you can calculate your deduction using one of two methods. You may opt to total the actual expenses incurred or use the standard mileage rate (57.5 cents per mile for 2020; 56 cents per mile for 2021).
If you opt to use the standard mileage rate, the only actual transportation expenses you may deduct for the year are business-related parking fees and tolls.
If you choose to deduct your actual transportation expenses, you may also be eligible to deduct actual car or truck expenses. These may include the following:
Depreciation
Garage Rent
Gas
Insurance
Lease Payments
Licenses
Oil
Parking Fees
Registration
Repairs
Tires
Tolls
If your car is used for both business and personal purposes, you must divide your expenses between business and personal use based on the miles driven for each purpose. Keep a log of your mileage and hold on to your receipts!
You may also be eligible to deduct the amount you reimburse your employees for car and truck expenses.
Travel & Meals
From time to time, business owners and employees alike may need to travel for work. If you are traveling away from home for your business, you may deduct associated expenses if the following conditions are met:
Your business duties require you to be away from the general area of your tax home for substantially longer than an ordinary day’s work. Your regular place of business is typically considered your tax home.
You need to sleep or rest in order to meet the demands of your work while away from home.
Travel
When traveling for your business, you may deduct the cost of travel by airplane, train, bus, or car between your home and business destination. This includes the costs of operating and maintaining your vehicle while away from home.
You may also deduct fares for taxi services, commuter bus, limousine, or other types of transportation (such as Uber or other ride-sharing apps) to your hotel from the airport or train/bus station, or between your hotel and your temporary work location.
Baggage & Shipping
You may deduct the cost of sending baggage or shipping samples and display materials between your regular and temporary work locations.
Meals & Lodging
If your trip is overnight or long enough that you require sleep or rest in order to properly perform your business duties, you may deduct the cost of meals and lodging.
Most taxpayers are eligible to deduct 50% of meal expenses for 2020; for tax years 2021 and 2022, the IRS has increased this threshold to 100%. This threshold will sundown on December 31st, 2022.
When calculating the cost of meals, you may use the actual expenses or the standard meal allowance provided by the U.S. General Services Administration, which typically varies based on the location of travel.
**Note that The Tax Cuts and Jobs Act (TCJA) of 2017 determined that entertainment expenses are no longer tax-deductible.
Other Deductible Travel Expenses
Other deductible travel expenses include the costs of dry cleaning or laundry while traveling, making business calls or using other communication devices for business purposes, and tips paid for any of the aforementioned expenses.
Business owners may also deduct the amount paid to reimburse employees for travel and meal expenses.
If you have questions about deducting transportation, travel or meal expenses, don’t hesitate to reach out; contact Seymour & Perry, LLC to schedule your free consultation.
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