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For a self-employed real estate investor, tax laws can be confusing. Some IRS tax codes are straightforward; others are a little quirky.
In this article, we'll look at some business travel expenses and allowable deductions.
If you are a self-employed taxpayer and meet specific criteria, you can deduct most of your travel costs.
For example, you can deduct business travel expenses away from your home if the trip's primary purpose is business or business-related. Those expenses include, but are not limited to:
Maybe you hate to fly; you can also deduct for travel occurring via:
Even if you mix business with pleasure, you can still deduct the trip's expenses, provided it passes the "primary purpose" criteria.
The "primary purpose" criteria mean that your trip's primary purpose must be business--it cannot be an undercover vacation. To make your case that your trip was a business trip and not for pleasure, you must provide evidence that you spent more time on the business than leisure.
That makes the number of business days as opposed to personal days incredibly important. One of the things in your favor as a self-employed taxpayer is that the days you spend traveling count as business days.
Here is a brief illustration of the "primary purpose" point:
Mr. Johnson is a self-employed taxpayer. He leaves for a business trip on Monday. Johnson inspects properties, draws up contracts, and closes deals on Tuesday, Wednesday, and Thursday.
Mr. Johnson relaxes and enjoys the city on Friday, Saturday, and Sunday before flying back on Monday. In total, Mr. Johnson was on an eight-day business trip.
Based on the illustration, Johnson spent five days on business:
You can creatively leverage the tax code in your favor. For example, you decided to take a business trip, and your non-employee spouse wants to come along. You cannot deduct the expenses attached to your spouse, but you can subtract the total of what you would have paid alone.
Another thing that the IRS allows exemptions for is meals as long as they are:
The most important thing to consider when deducting meals is a precise documentation of the meals:
Your thorough documentation is the evidence you need to justify a tax deduction.
You should know about IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits. In the guide, there is a section about working conditions fringe benefits. An applicable tax exemption is the business use of a company vehicle.
You can deduct the total mileage driven in a tax year multiplied by the standard mileage rate of $0.56 (down 1.5 cents from 2020).
Another option is calculating an itemized list for vehicle expense which may include:
Just like for meals, your documentation must be thorough and accurate.
Another IRS rule you should know is Topic No. 511 Business Travel Expenses, also called the "away-from-home rule."
Home for tax purposes is the tax home, not your actual home. The tax home for your business is the general area where you (the taxpayer) conducts business.
The IRS uses the term "away-from-home" to describe taxpayers who are not within commuting distance from home. If you work away from home for more than a typical workday and require sleep, the related costs are tax-deductible.
In contrast, if you work within commuting distance from home (and are away from home) but decide to sleep away from home--those costs will not be deductible.
However, if you do not follow the rules, everything is still deductible by you (the employer). The reimbursement will then be added to the employee's taxable wages and subjected to payroll withholdings and FICA.
An "accountable plan" requires the employee or business partner to provide justification and adequate proof of all expenses during job-related travel. This plan lets you (the employer) properly deduct these expenses (assuming you provided receipts!).
When reimbursements are made from the employer to the employee without an accountable plan, they are taxable. The employee will need to file a miscellaneous itemized deduction (Form 1040). These deductions will need to be made under Schedule A on the form and are subject to a 2% AGI nondeductible threshold.
As a result, the employee will not be able to deduct some or all of the expense. If the employee must file deductions for lodging and meals, they must be away from home for at least one night (per the away-from-home rule). Any travel that lasts longer than a year will likely be unable to be deducted.
As the employer, you can deduct business expenses that are "ordinary and necessary." These expenses include job-related travel and lodging expenses.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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