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Tax Rules On Auto, Entertainment And Travel
I. Travel Expense
Section 162(a)(2)
Including amounts for meals and lodging (other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business.
- Both give rise to tax deductions.
- Travel may have transportation components in it.
- Transportation is a movement within a destination.
- Travel is movement from destination to destination while away from your tax home overnight.
Ordinary and necessary expenses incurred while the taxpayer is in travel status (i.e., traveling away from home in pursuit of a trade or business).
An ordinary expense is one that is common and accepted in the taxpayer’s field of business, trade, or profession.
A necessary expense is one that is helpful and appropriate to the taxpayer’s business. The expense does not need to be indispensable to be necessary.
When the expense to the extent becoming lavish or extravagant.
If the expense is reasonably based on the facts and circumstances, the expense is not considered lavish or extravagant.
It is essentially factual and will vary from place to place and from circumstance to circumstance.
The expense will not be disallowed because they are more than a fixed dollar amount or take place at upscale restaurants, hotels, nightclubs, or resorts.
The travel expense may be amortized under Section 195.
Under §195, the costs of getting started in business, before actually beginning business operations, must be capitalized (after an initial $5,000 deduction) but, at the election of the taxpayer, can be amortized over a period of 180 months or more (§195).
(1) A cost that would be deductible if it were paid or incurred to operate an existing trade or business, and (2) Paid or incurred before actually beginning business operations (§195(e)).
Legal expenses for drafting purchase documents, incurred in the unsuccessful attempt to acquire the business.
The job hunting or finding of a new job must be in the taxpayer’s same trade or business to be deductible under Section 162.
The criteria include continuity and regularity of business activities by a taxpayer.
Reg. §1.162-5(b)(3) provides that a change of duties does not constitute a new trade or business if the new duties involve the same general type of work as is involved in the taxpayer’s present employment.
Miscellaneous itemized deductions were allowed as a deduction only to the extent that the aggregate amount of those deductions exceeded 2% of adjusted gross income.
Note: From 2018 through 2025, all miscellaneous itemized deductions that were subject to the 2% floor are suspended.
Costs for typing, printing, mailing resumes, and employment-agency fees.
Section 62(2) provides that an employee is allowed to deduct from gross income in computing the employee’s adjusted gross income: (a) Reimbursed expenses, (b) Expenses for travel away from home, and (c) Transportation expenses.
Job-hunting expenses for travel and transportation are allowable as deductions from gross income in computing adjusted gross income (R.R. 77-16)
They may claim the standard mileage allowance for each job-hunting mile.
or
They can deduct actual expenses plus depreciation (or lease payments), in the ratio of total annual business miles to total miles traveled during the year.
The employer-paid outplacement services may be excluded from an employee’s gross income as a working condition fringe under §132(d).
Note: The benefits do not constitute wages for FICA, FUTA, and income tax withholding purposes (R.R. 92-69).
The expenses in connection with investment activities may be deductible under §212(1) or (2) which permits a deduction for all ordinary and necessary expenses paid for the production or collection of income or for the management, conservation, or maintenance of property held for the production of income.
(1) The trip is part of a rationally planned, systematic investigation of business operations; (2) The costs are reasonable in relation to the magnitude of the investment and the value of the information reasonably expected to be derived from the trip; (3) The circumstances negate a disguised personal motive for the travel; and (4) The information gained from the trips is used to make investment decisions (Kinney, 66 TC 122 (1976)).
For trips that merely give him or her “a feel for the market” and are not tied to specific transactions
They are miscellaneous itemized deductions and they were deductible only to the extent that, in aggregate, they exceeded 2% of adjusted gross income.
Note: From 2018 through 2025, all miscellaneous itemized deductions that were subject to the 2% floor are suspended.
Miscellaneous itemized deductions are all deductions other than those allowable in arriving at adjusted gross income and for personal exemptions.
Costs of attending a convention, seminar, stockholders’ meeting, or similar meeting that is related to investment activities and not related to the taxpayer’s trade or business.
The costs of traveling away from home if the primary purpose of the trip was to collect rental income or to manage, conserve, or maintain their rental property.
An investor can also deduct travel expenses incurred in traveling away from home to look after the income-producing property.
The deduction was allowed for meals, lodging, and travel expenses to unimproved investment property for the purpose of keeping it free from undergrowth, dead trees, rubbish, and trash.
Such expenses are allowed “above the line” and are used to arrive at adjusted gross income.
Note: These expenses are not miscellaneous itemized deductions subject to the 2% of AGI limitation.
A taxpayer must have gone beyond general search or preliminary investigation of an investment, and as focused on a specific acquisition, expenses incurred therefore would be capital in nature.
The expense is personal and it is not deductible.
The ordinary and necessary expenses of getting from one workplace to another in the course of the taxpayer’s business or profession when traveling within their tax home area.
The expenses must be reasonable and necessary.
The traveling expenses to and from the destination are deductible only if the trip is related primarily to the taxpayer’s trade or business.
If the trip is primarily personal in nature, the traveling expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at the destination.
Note: The expenses while at the destination that are properly allocable to the taxpayer’s trade or business are deductible even though the travel expenses to and from the destination are not deductible.
The amount of time during the period of the trip that is spent on personal activity compared to the amount of time spent on activities directly relating to the taxpayer’s trade or business is an important factor in determining whether the trip is primarily personal.
They are deductible.
The taxpayer needs to determine their tax home.
For some taxpayers who travel, keep two homes or places of business, or have no definite home, it can be hard to decide where “home” is for tax purposes.
The Second and Ninth Circuits follow a subjective approach that places emphasis on where the taxpayer regards his or her residence to be. These circuits reject the Service’s “tax home” concept and define “home” as it is commonly conceived, not as the principal place of business.
It is referred to in §162(a)(2) as the place away from which traveling expenses must be incurred to be deductible is the place at which the taxpayer conducts the trade or business.
(1) The taxpayer’s regular or principal (if more than one regular) place of business.
or
(2) If the taxpayer has no regular or principal place of business, then at the taxpayer’s regular place of abode in a real and substantial sense.
The taxpayer cannot deduct travel expenses between their tax home and their family home.
Note: The cost of meals and lodging while at their tax home is also nondeductible.
A taxpayer’s “tax home” is their principal place of business, employment station, or post of duty, regardless of where their family lives (R.R. 60-189; R.R. 75-432; Barnhill v. Commissioner, 148 F2d 913; Karp, TC Memo 1976-325).
Note: Spouses may have separate tax homes even though they live together and file jointly.
The IRS has ruled that a taxpayer’s tax home is not limited to a particular building or property.
Note: The place of employment embraces the entire area, city, or general locality where the taxpayer usually carries on trade or business, according to the IRS. Therefore, travel within this general area will not qualify as away-from-home travel.
For example, a taxpayer has no principal place of business or employment but continually changes work locations over an extended area.
The taxpayer must meet two of the three following requirements:
- The taxpayer performs a portion of his or her business in the vicinity of his or her claimed abode and uses such abode (for purposes of his or her lodging) while performing such business there.
- The taxpayer’s living expenses incurred at his or her claimed abode are duplicated because his or her business requires him or her to be away.
- The taxpayer either:
- Hasn’t abandoned the vicinity in which his or her historical place of lodging and his or her claimed abode are both located;
- Has a member or members of his or her family (marital or lineal only) currently residing at his or her claimed abode;
- Uses his or her claimed abode frequently for purposes of his or her lodging (R.R. 73- 529; Hall, TC Memo 1964-157).
If a taxpayer has no principal place of business or regular place of abode in a real and substantial sense.
The tax home is their main place of business, or principal employment or business is located.
- Total time ordinarily spent in performing duties in each area.
- Degree of business activity in each area.
- Relative significance of the financial return from each area.
The sleep and rest rule.
The rule requires the taxpayer to prove that it is reasonable to need sleep and rest during release time to meet the demands of his or her employment.
A substantial period is one that is of such duration that the taxpayer could not reasonably be expected to complete the round trip without stopping regular duties for sufficient time to obtain sleep or rest.
Note: A nap in a car does not qualify.
Because the taxpayer returned home each day for dinner.
- In a temporary change, the “tax home” stays the same, and all expenses for traveling, meals, and lodging are deductible as travel “away from home.”
- If, however, the change is indefinite, the “tax home” is considered to move with him or her and he or she cannot deduct the expenses of travel, meals, and lodging while there.
Note: Any amounts an employee on an indefinite assignment receives from his or her employer for living expenses must be included in the employee’s income, even though they may be called travel allowances and they account to their employer for them.
Their tax home may move with them and deny them a deduction for meal and lodging expenses.
It is considered indefinite, and no deduction for travel expenses is allowed.
They are not considered away from home while at their tax home. Taxpayers cannot deduct the cost of their meals and lodging at their tax home.
Indefinite.
Note: The probationary employee may not deduct any of his or her expenses or meals and lodging for the test period.
When they are on a permanent duty assignment overseas, they are not considered to travel away from home.