Deduction of Expenses Associated with Business Travel

Actual vs. Optional Method

An individual can take an employee business expense deduction on Form 1040, Schedule A, Itemized Deductions, as Unreimbursed Employee Business Expenses, subject to 2% AGI limitation. Therefore, it is preferable for the employer to reimburse employees for business related expenses. Although the deduction in this event is not available to the employee to the extent the employer reimburses the employee. If the amounts of business related expenses are significant, those employees should have a separate credit card solely used for business expenses.

The expenses include such items as cost of lodging, meals and other expenses when traveling away from home for business or any other incidental business expenses. Examples of incidental business expenses are fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewardesses, etc; transportation to the place where meals are taken, if meals cannot be obtained on site and if transportation is not provided; mailing costs associated with filing travel vouchers or payment of employer-sponsored charge card billings. These expenses do not include expenses for laundry, cleaning or pressing of clothing, lodging taxes, or the costs of telegrams or telephone calls.

In order to claim the deduction for incidental expenses, the employee must establish when, where and why he or she was away from home. An individual can choose to keep track of actual incidental expenses and deduct the actual amount spent. On the other hand, he or she may use an optional method, which allows a set amount per day and no receipts are required to be kept. Per Diem rates for lodging and meals have changed effective October 1, 2004. The rate for the high-cost localities has dropped to $199 per day, down from $207, while the low-cost localities rate has been increased to $127, up from $126. The incidental expense rate remains the same at $3 per date.

While the new rates may be used starting October 1, 2004, a taxpayer may opt to continue using the 2003 rates for the last three months of 2004. However, the methods cannot be switched prior to January 1, 2005.

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