The general rule for out-of-town business travel expenses is that you can deduct them as long as the work assignment is "temporary." (This includes transportation to and from a work site, lodging, 50 percent of meal costs, and so forth.)
On the other hand, if the work assignment is not temporary, your tax home is considered to shift to the work location, and your travel expenses are then considered to be non-deductible personal outlays. In one recent decision, the U.S. Tax Court found in favor of the taxpayer on this issue, which can affect employees who pay their own expenses (without reimbursement) and self-employed taxpayers.
Before getting to the decision, let's first cover the basics on out-of-town business travel expenses.
When you travel away from your tax home overnight on business, you can deduct the round-trip transportation cost (for example, car expenses or airfare and parking), plus 100 percent of lodging costs for business days, plus 50 percent of meal costs for business days, plus 100 percent of incidentals (such dry cleaning costs) for business days.
Your tax home is located at:
1. Your regular place of business or your principal place of business if you have more than one regular place of business; or
2. Your regular abode if you have no regular or principal place of business.
The purpose of allowing deductions for out-of-town business travel expenses is to give you a tax break for all the duplicative expenses incurred while at the temporary work location. However, an itinerant worker (such as a traveling salesman or self-employed casualty insurance adjuster who moves from one disaster site to the next) doesn't have any tax home and therefore does not have any duplicative expenses. As a result, itinerant workers can only deduct transportation costs between work locations (no deductions for lodging, meals, and incidentals).
In general, an out-of-town work assignment at a single location is considered to be temporary, which is a prerequisite for deducting travel expenses, if it is realistically expected to last one year or less and does in fact last that long. If an away-from-home assignment is realistically expected to last more than one year, or there's no realistic expectation that it will last one year or less (such as an assignment with an indefinite term), the assignment will be treated as indefinite regardless of how long it actually lasts. In this scenario, the travel expenses are non-deductible.
Of course, expectations can change. If so, the worker will not be penalized under these rules. For example, if an initial eight-month assignment is extended for six additional months, the assignment is treated as no longer being temporary when it is extended. But travel expenses for the first eight months can still be deducted, because the assignment was temporary during that period.
Instead of keeping records of actual expenditures for lodging, meals, and incidentals while out of town on business, an employee can choose to deduct a fixed daily (per diem) IRS-approved amount (subject to the 50 percent allowance rule for the portion of the per diem that is allocated to meals). More specifically, the per diem amount can be deducted regardless of actual expenditures for lodging, meals, and incidentals as long as the employee is able to prove with adequate substantiation the time, place, and business purpose of the travel. While receipts are not required to prove expense amounts when using the per diem method, you may find it convenient to keep lodging receipts (which conclusively prove the dates and places of your travel) on which you note the business purpose for the travel.
Key Point: The IRS-approved per diem rates can be found on the General Services Administration's website at www.gsa.gov/perdiem.
Finally, employees must treat unreimbursed business travel expenses as a miscellaneous itemized deduction item. If the travel expenses, when combined with other miscellaneous itemized deduction items (such as investment expenses, fees for tax preparation and advice, and union dues), exceed 2 percent of the employee's adjusted gross income, the employee can deduct the excess.
Recent Tax Court Decision
In a 2014 case, the Tax Court concluded that the taxpayer's six-month out-of-town work assignment was indeed temporary, which allowed him to deduct his business-related travel expenses. However, his claimed deductions were reduced because he failed to keep adequate records of all his expenses.
Facts of the case: Roj Carl Snellman was married and lived in Florida. In late May of 2009, he began work as a project manager at a job site in Missouri. His assignment was to manage the development of a system to track a company's customer credit card payments. While the company paid Snellman a salary equivalent to $90,000 a year, the project was expected to be completed by the end of 2009, at which point his employment would end. Snellman wasn't reimbursed for any work-related expenses, so his out-of-town expenses came out of his own pocket.
Snellman drove from his home to the Missouri work location and stayed in a hotel from May 25, 2009 through June 10, 2009. On June 11, he signed a lease to rent an apartment for $525 per month through December 31, 2009. As it turned out, the company experienced financial difficulties, and Snellman's employment was terminated early on November 2, 2009. He drove back home to Florida about two weeks later.
On their joint 2009 federal income tax return return, Snellman and his wife claimed car expenses of $4,060 plus $27,200 for lodging, meals, and incidentals (based on the applicable per-diem rate of $170). After auditing his 2009 return, the IRS disallowed all of these deductions on two grounds:
First, the IRS claimed that Snellman's tax home was in Missouri for the entire time he was there, which meant he wasn't entitled to any business travel deductions because he wasn't away from home.
Second, the IRS disallowed his travel deductions due to inadequate substantiation.
Snellman took his case to Tax Court where he was rewarded with an opinion that was partly in his favor. Specifically, the court agreed with Snellman that his tax home in 2009 was in Florida rather than Missouri, which was a prerequisite for deducting travel expenses. Snellman credibly testified that he was hired to work in Missouri as a temporary project manager for approximately seven months, and that the employment actually lasted for only six months. His testimony that his employment was temporary, as opposed to indefinite, was corroborated by the fact that his Missouri apartment lease was scheduled to expire on December 31, 2009 and that he negotiated an addendum to the lease agreement to allow for early termination on short notice if his employment ended sooner than expected.
However, the Tax Court reduced Snellman's claimed deductions because he didn't maintain the required records. He didn't keep a contemporaneous log of his business-related car mileage, and he didn't properly keep track of the dates and business purpose for his lodging expenses. Had he kept good records, he would have won a total Tax Court victory. (Roj Snellman, T.C. Summary Opinion 2014-10)
What Other Taxpayers Can Learn from the Case
The Snellman decision illustrates that failure to keep adequate records for out-of-town business travel expenses may mean the IRS will completely deny your claimed deductions. You may have to go to Tax Court if there is really no doubt that you are entitled to at least some deductions. As stated earlier, Snellman would have won a complete victory in the Tax Court if he had kept good records, and he could have avoided the entire issue if he had done so. If you have questions or want more information about keeping records of business travel expenses, consult with your tax adviser.