Travel expense accounting: how to correctly reimburse travel expenses
Business trips are the order of the day in many professions. In most cases, the costs incurred are paid by the employer, but not always. If employees have to bear the travel expenses themselves according to the contract, they can declare them as deductible in their tax return. To make sure the process runs smoothly, you have to document everything on a travel expense report.
- What is a travel expense report?
- How do employers pay for employee travel expenses?
- Which expenses are tax deductible and which aren’t?
- Traveling with your own vehicle
- Deductible expenses for international business travel
What is a travel expense report?
A travel expense report is an organized way for businesses and employees to track and report their expenses when they go on business-related trips. The report itself can either be printed out on paper or be digital in the form of a spreadsheet. Employees are also requested to attach any receipts to the form for tax purposes. It is especially important to track any expenses that are tax deductible. In order to stay on top of reimbursable expenses, employees are often given a deadline by which they need to file an expense report and turn in applicable receipts.
When your duties require you to be away from the area of your tax home for longer than an ordinary day’s work and you need to sleep or rest in order to do your work, this counts as traveling away from home. Your tax home is usually the entire city or area where your main place of work is situated, regardless of where your home is. For example, you live in New York, but work in Philadelphia where you stay in a hotel and eat meals there the whole week, returning to New York every weekend. Since Philadelphia is your tax home, you cannot deduct any travel, meal, or accommodation expenses there. Traveling back home at the weekend isn’t for work and so these expenses also aren’t deductible.
How do employers pay for employee travel expenses?
Make sure you’re familiar with your company’s business travel policy so that you know what you will get reimbursed for. There are three ways that companies pay employee travel expenses.
Company credit cards
These are often given to employees that have to travel often. They can simply pay for everything business-related on this card and for situations that require cash (e.g. tips and snacks), employees can note these down in the travel expense report. By paying directly with the credit card, it saves the employee a lot of trouble since they don’t have to use their own cash before being reimbursed.
If the company prefers cash, the employee will have to fill out a travel expense report, listing everything they’ve spent their money on. Receipts are required and often justification is needed for each expense. However, big costs such as accommodation or flights are almost always paid for by the employer on the company’s credit card. It would be unfair to expect the employee to fork out so much even if they are getting reimbursed afterwards.
This is a kind of daily “allowance” that the employee is given to pay for their expenses. It’s up to them how the money is spent and if there is some left over after the business trip, the employee is usually allowed to keep this. This allowance isn’t expected to cover all the expenses since the bigger amounts such as lodging are often already paid for by the company.
With this method, you don’t have to show any expense receipts.
Which expenses are tax deductible and which aren’t?
If your employer won’t cover your expenses, or maybe you’re the employer yourself and want to see what you can deduct from your taxes, use Form 2016 for this. Knowing in advance which expenses count and which don’t, can save you a lot of trouble later on.
As long as you’re working in a different location to where your home is, these expenses can be classified as tax deductible. Here are some examples of expenses which you can claim tax back on:
Whichever mode of transport you use to get to your destination, you can deduct the expense. If you use your own vehicle, you can work out what to deduct (explained in more detail below). Tolls and parking fees can also be deducted.
Where you stay on your business trip also qualifies as a tax deductible, but make sure to ask for an itemized bill since what you spend at the mini bar and on renting movies, won’t count.
The Internal Revenue Service (IRS) generally allows 50% of the costs of meals on your business trip to be deducted from your taxes so don’t expect whole meals to be covered.
Conference fees, equipment rental, etc.
Any events you visit for work purposes can be deducted if you had to pay a registration fee, for example. The same goes for any tools or equipment you had to rent in order to do your job.
Others include business calls, shipping baggage between your regular and temporary places of work, and dry cleaning and laundry.
If you try to claim everything but the kitchen sink on your tax form, the IRS are more likely to audit you, so don’t bother declaring these expenses because they won’t be accepted:
Family travel costs
You can’t deduct costs that your family have made e.g. their travel costs or meals. If they stay in your hotel room, you can still write this off because you would have to stay there whether they came or not.
Expenses in your home city
You’re able to deduct meals that you eat in your home town for the purpose of entertaining a client, but you can’t stay in a hotel near your home and expect to be able to claim the costs back.
Traveling with your own vehicle
Not all business trips are made by train, plane, or taxi: sometimes employees feel more comfortable using their own vehicle to get to different work locations, conferences, or hotels.
Deduct mileage from taxes
You can use the IRS Standard Mileage Rate to work out the maximum per-mile rate allowed by the IRS for business purposes so that you can deduct it from your taxes. When doing your 2019 taxes, you use the 2018 standard mileage rate, which is 54.5 cents per mile for business miles driven. You can use the mileage reimbursement calculator to work out how many miles you can deduct for business as well as medical, moving, or charitable purposes.
Your employer won’t reimburse you for your daily commute to work nor can you deduct expenses associated with traveling from your home to your place of work since the IRS classifies this as a personal expense. Deductions and reimbursements are only possible for business trips.
Be reimbursed by your employer
Some companies will reimburse their employees for miles driven on behalf of the company. In order to be reimbursed, the driver has to keep a record of the miles they’ve driven. You may also be required to keep all gas receipts. Write down the amount of miles displayed on your odometer before you begin the trip and don’t forget to note down the amount shown once you’ve arrived.
Make sure you know exactly what counts as “business travel” according to your company as well as what their approved mileage reimbursement rate is. If it’s 54.5 cents per mile and you drove 1,000 miles for business purposes, the calculation would look like this:
Deductible expenses for international business travel
If you go overseas for work, you can’t automatically deduct everything you spent there. The trip must be “entirely for business” or “considered entirely for business”.
Entirely for business
According to the IRS, this is when you spend practically ALL your time doing business activities while you’re abroad.
Considered entirely for business
It’s normal to do a little bit of sightseeing on your trip so luckily you can still claim your expenses as long as you didn’t have substantial control in arranging the trip and went because ‘you had to’. You must spend at least 76% of your time doing work-related activities to be able to deduct all your expenses. If you do some vacationing while away, you must prove that the vacation portion wasn’t a major consideration of making the trip.
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