A Full Guide to Corporate Travel Expenses
- What do per diems cover?
- Who has to pay for gas when employees want to take their personal vehicles on a trip?
- How can I maximize my tax deductions?
How Does the IRS Define Travel Expenses?Let’s start with the most crucial part: the government. Each part of your company’s travel policy has to align with the IRS’s rules and regulations. Otherwise, parts of the business trip won’t be reimbursable, and you or the employee will be out of that money. The government defines travel expenses as “ordinary and necessary” parts of leaving your home for business purposes. The key is to make sure what you see as essential matches the IRS definition.
What Does “Ordinary and Necessary” Entail?Business travel generates such an impressive return on investment (ROI) partly because much of it is tax-deductible. By spending money, you can save money — provided those expenses fall under the category of ordinary and necessary. Anything outside of the ordinary or necessary isn’t likely to be approved. Examples might be anything lavish or ostentatious, like taking a luxury jet, or unnecessary (for business) like airfare to bring your spouse, children, or pet along. Here’s what “ordinary and necessary” includes:
You’re Spending Time Outside of Your Tax HomeCorporate travel is a work trip that requires you to leave your tax home for more than a typical day’s work for business activities. Your tax home is the surrounding area of your principal place of business, not your personal lodging. You can’t deduct the travel expenses that accrue while heading to work from home and back. Nor can you use the “travel expenses” category for things you do while in your tax home during the course of your typical workday.
Your Work Assignment Has an End DateYou’ll need to have a place to sleep or rest while away, transportation to and from your destinations, and food for each meal. These are “ordinary and necessary” expenses for the duration of your trip. If the length of your work assignment is indefinite, i.e., longer than one year, it’s no longer a business trip. It’s a temporary reassignment to a new location, and that area becomes your tax home for the year.
Your Attendance Benefits the BusinessLet’s say there’s a comic convention in Vegas that you’re interested in experiencing. It has no bearing on your trade or business, but you’d love to go, and someone suggests you attend and write the expenses off as business travel. Not to burst your comic bubble, but the IRS will not approve those costs unless you can link your attendance with your business. However, should you find a way to include work purposes within your time at that convention, some of the trip may be tax-deductible.
Foreign Travel ExpensesThinking about making an international business booking for some of your employees? Talk to your CPA before you do. Domestic and foreign travel have different rules, and these are often based on the destination. You’ll need to ensure all your documentation is in place — you’ve dotted the I’s and crossed the T’s. This is vital as the IRS looks closely at international travel expense transactions used as business deductions. Discover: 6 Updates for your Corporate Travel Policy
What Can I Use as Tax Deductions?Corporate travel expense tax deductions, as mentioned, must be business-related, and you must be away from your tax home. Those are the general rules. The IRS gets more specific, explaining what is and isn’t tax-deductible. When debating whether a cost is justifiable as part of your ROI or not, keep the following tax deductions in mind.
Approved Deductible Travel ExpensesSending your employees (or yourself) out on an extended business trip should be an expense that more than pays for itself. However, the initial costs have to come out of your budget. The goal is to ensure those costs are reimbursable as either a directly increased profit or a tax deduction. What counts as increased profit is up to you and your company. The IRS determines tax deductions and includes these necessary expenses:
- Transportation costs, including airfare, train, bus, and rental car expenses
- Parking fees
- Rideshare, taxis, or other transports that take you from your airport, bus, or train station to your hotel and back (or from the hotel to your meeting space)
- Shipping of any essential display materials and baggage to and from your work locations
- Use of your personal vehicle for business purposes (deducting actual expenses or the standard mileage rate, tolls and parking fees)
- Meals that center around business purposes, and tips for services
- Business-related dry cleaning and laundry
Keeping Track of Your Business ExpensesKnowing what you can deduct is half the work. The rest of it involves tracking your expenses. Business meal deductions are limited to 50% of the unreimbursed costs. Other expenses are based on the federal per diem and standard mileage rates, which vary depending on the zip code in which the services were provided. Other variables include travel costs for self-employed individuals, farmers and military personnel. It can get complicated to keep records of every expense, and the deductions are frequently based on federal limits anyway. This is why most companies choose to use per diems for business travel. You may also like: Our Full Guide to Corporate Travel
How Do Per Diems Work?Your corporate travel policy decides whether employee reimbursement is expense-specific or determined by per diem rates. If the policy goes the per diem route, each traveler receives a capped amount that they can spend each day on necessities. The business sets this amount, but it must at least meet the federal guidelines. The minimum standards change each year and vary by zip code.
Making Per Diems EasierIn practice, say your traveler is heading to a meeting in Phoenix, and the lodging per diem for that city is $102/night. They’d be able to choose where they stayed, and anything over the $102 would be out of their pocket. However, they’d keep the overage if your company rates could get them a discount under $102 for the same room. Per diem processes for choosing providers and covering expenses depend on the employer. Some businesses choose to limit travel costs or include a list of preferred vendors for travelers to work with. Other places provide a per diem daily allowance, and the individual can spend it on covered expenses however they please.
Reimbursement and Income Tax Concerns for Per DiemsIn a typical per diem-based trip, the employer pays the higher costs, such as transportation and lodging. The traveler then covers related expenses out of their own money, getting reimbursed for them upon completing an expense return after the trip. Per diems cover meal expenses, transportation and incidental expenses (e.g., dry cleaning). Anything you expect your team member to do for business purposes should not come out of their funds. If they choose to add personal expenses, like souvenirs or luxury purchases, while they’re on the trip, you would not reimburse those. It’s important to complete the expense report and reimbursement process correctly. Otherwise, this “pay” becomes taxable for the employee. The business is using per diems as a tax-deductible expense, and the employee should not have to pay taxes on it as an income.
How Are Mileage Reimbursement Rates Calculated?The easy part about mileage reimbursement rates is that you don’t have to create your policy from scratch. The government sets the base rates and coverage framework. Your company can expand from there and offer more, but you can’t offer less. The biggest question is whether you want to offer your travelers fixed or variable cost reimbursements.
Fixed Versus Variable ReimbursementThe standard mileage rates are simple to calculate. According to the IRS, you reimburse employees who drive their personal vehicles for business purposes. Reimbursement includes a set amount per mile. In 2022, that rate is 58.5 cents, but it changes each year to account for fixed and variable costs.
Fixed and Variable Rate PlansStandard reimbursement makes it easy to deal with the occasional on-the-clock driver. There’s another option you can use to figure out the valuation for larger companies that deal with this frequently or have fleet vehicles. This is the fixed and variable rate allowance, commonly referred to as FAVR. In a FAVR policy, you will reimburse employees in periodic fixed or periodic variable payments. The fixed payments cover all the costs of owning and driving a car, including:
- Registration fees
How Can We Reduce Travel Costs?It’s statistically proven that travel expenses, when done correctly, can generate a substantial ROI. These corporate expenses are often too much for a small business to handle while waiting for the return to appear. When your small or medium company wants to take advantage of business trips, you need in-the-moment reduced costs.
Tips to Save Money on Your Corporate Travel BudgetChoosing the reimbursement policies that are fair for your employees, but save you resources, is important. Want to increase your bottom line right away? Create processes with your expense management software that reduce paperwork and time spent on each step. As you’re watching your expenses in action, there are a few things you can do to lower the costs, like:
1. Use Business Credit Cards (or Virtual Cards)Use designated cards to gain points and earn rewards on spending, then cash those in when you book travel.
2. Sign Up for Corporate Promo Codes with Your Preferred ProvidersWhen you rent a car, book a rideshare or buy materials for your event, don’t hit “pay now” without using a promo code.
3. Look for Providers and Services Outside of “Tourist” AreasHost your venue in a central spot if you must, but consider booking lodging outside of those prime locations. Your employees will find it cheaper to shop, dine and explore off the beaten path (as long as they can still access easy transportation options). For the deepest travel discounts in real-time, use dedicated platforms that handle one facet of travel. These providers are experts on ways to save money while still getting the best quality possible.
Use Hotel Engine to Book Your RoomsHotel Engine is the world’s largest Lodging Performance Network. Thousands of businesses use our platform to book and manage their lodging needs. With Hotel Engine, everything happens on one intuitive dashboard. Members save up to 60% on lodging, regardless of how small or large their business or bookings are. You’re not involved in any contracts, and there are no additional fees. Choose lodging from over 2,700 brands then take advantage of the simplified direct billing and trends data attached to your account. It’s convenient, fast and free. Even better, you’ll see your actual costs decrease in real-time, letting you put those funds toward other travel spend necessities. See also: 10 Tips to Reduce Employee Travel Costs
ConclusionCorporate travel and expense management doesn’t need to be a hassle for you and those you’re sending on the road. With experts like Hotel Engine, every step of your next business trip can go smoothly. From putting the pieces together to dealing with the tax essentials, we’re here to help. Sign up for free on Hotel Engine and get exclusive savings starting now!
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Audrey Fairbrother is the Content and SEO Manager at Hotel Engine. She spends her days writing about all things business travel, researching topics that are important to Hotel Engine’s audience and cultivating the company’s brand voice. When she’s not working, Audrey enjoys spending time with her family, and hiking in the nearby Rockies with her dog, Albie.