By Renee Schweke, EA
This talk is based on §162 of the Internal Revenue Code, Title 26 – Rules for business travel reimbursement.
Self-employed going somewhere
In today’s modern work world, lots of young people are finding ways to go out on their own and establish legitimate business start-ups that they hope will launch them into the world of entrepreneurship and financial success. Recent college graduates are smart, savvy, and not finding traditional jobs, so they bootstrap and make a go of it on their own. I see a lot of young people out on the subway platforms with their laptops, and I’m sure they are doing super-important business stuff. So I want to talk a bit about how subway travel expenses for self-employed people might add up to big savings at the end of the year.
In a nutshell, the IRS knows that businesses have business expenses. We all know the rule of thumb, “spend money to make money.” That often includes incurring travel expenses. Businesses travel to meet clients, attend trade shows, and to do all kinds of business endeavors.
The IRS doesn’t contest that, and they want you to keep doing whatever it is you’re doing to be successful with your business. They aren’t interested in standing in your way. However…
The IRS expects and requires all businesses to keep really good records that substantiate business activities. If you don’t record it right, you could retroactively lose your right to deduct those expenses, should your claims be examined at a later date. If you’ve already filed your tax return 3 years ago, by the time they look at your return, you could be in some hot water.
Let me explain how to do it right.
According to §162, travel must be:
- Directly related to the trade or business
- Ordinary and necessary for business purpose
- Substantiated with a contemporaneous log by diary or account book, time and place of travel, business purpose and the business relationship with the person or place visited for business.
Translated into practical terms, let’s say I have a consulting business where I empower people to brush their hair. I live in Brooklyn. I have an appointment with a Leah Linda, who wishes to encourage her staff to come to work properly groomed each day. I am to go to her Manhattan office and demonstrate proper hair-brushing hygiene and discuss the benefits of using a hairbrush each morning before leaving for work.
I fulfil the requirements of §162 as follows:
- The meeting with Leah Linda is directly related to my trade or business of being an expert in brushing hair.
- The trip on the subway is ordinary and necessary because there is a reasonable expectation that I would be taking the train from Brooklyn to Manhattan and not walking there, or another means of transportation that might otherwise be of no cost to me. (Horse?)
- My subway ride to her office is necessary for me to get to the meeting since I haven’t invited her or her staff to meet at my office or home.
- In order to fulfil the contemporaneous log and business relationship requirement, I will save all the emails, contracts, etc. showing that I agreed to go there and was paid for my service. If she pays me in advance, I’ll keep a copy of that receipt together with the above. If she pays after (not ideal) then remember to print and attach. All this needs to be kept in a separate folder, book, etc. just for the purpose of recording travel expenses.
So you see, it’s really not that difficult to save a bunch of money that can come right off your “bottom line” at the end of the tax year. It may even help you generate a refund that you can put right back into your business, or use to buy a present for your Aunt Matilda’s birthday.
Most people think of business travel as airfare, but it can be as simple as a bunch of subway rides that add up throughout the year.
(And yes, at $2.75 a ride, that can add up quick.)
For more information visit the IRS website: