Questions About Tax Deductions for Travel

My husband and I own a small environmental consulting startup. Because our company cannot yet afford to pay him, he works in construction and has recently been assigned a three-year job in North Carolina. He travels home on weekends, but living apart and missing his daily input as an officer in the company has been a hardship. Can his travel home be counted as a tax deduction for our company? What about his $100 per diem allowance. Is that a taxable wage? —E.F., Albany, Ga.

Let's start with your spouse's weekend travel expenses. We'll assume they are not being reimbursed by the construction company, which theoretically makes them eligible for deduction by your startup consulting business.

Just because the costs are eligible, however, does not mean they are a valid business deduction, says Les Bryson, director of implementation at alliantgroup, a specialty tax service provider headquartered in Houston. "The determining factor is if the startup company can substantiate a business reason for the husband's travel, instead of a personal reason," Bryson says.

Close IRS Scrutiny

Unless your spouse can prove that he must travel home to attend company meetings every weekend, it will be difficult to make the case that his travel is strictly for business reasons, says Kathy Suits, an enrolled tax agent at Summit Capital Advisors in Tacoma, Wash. "The IRS is scrutinizing business travel very closely," she says. "A conservative recommendation would be not to take the travel deduction, because it would be difficult to justify as business, and not personal, travel."

If he can document dates when he is traveling home specifically to attend a company board meeting or see an important client, those expenses might be deductible, even if the routine weekend travel is not. In any case, talk to your accountant about any business deductions. And make sure to keep careful and detailed records that will sustain any deductions your company takes, says Bob Schroeder, a CPA in Palm Beach, Fla. Expense travel records should include a business report of the trip, the date and place of the trip, and receipts for lodging, if applicable.

Now let's turn to your question about the $100 daily per diem. Whether it counts as a taxable wage depends on how his contract with the construction company is written. He should speak to his human resource manager about how the company is accounting for his per diem.

Adding Per Diem to Wages?

"Tax rules dictate that per diem payments are not part of an employee's wages if the payment is equal to or less than the federal per diem rate and the employer receives an expense report from the employee," Bryson says. Federal per diem rates listed by the U.S. General Services Administration seem to indicate that $100 is less than the federal rate for North Carolina.

Your spouse's employer may be adding his per diem to his wages, however, making them taxable income, because he is under a three-year contract. "Travel from home to a 'permanent'—more than one year—job site is considered commuting, even when it is far away. It is not deductible," says Steve Sahlein, co-president of the American Institute of Professional Bookkeepers.If your husband had what the IRS considers a temporary job (less than one year) and he submitted expense reports for his travel, the cost would be more likely to be tax deductible. IRS Publication 525, Taxable and Nontaxable Income, may be helpful to you.

It is indeed more difficult to start a small business when the partners are not in the same location, but it's not all that uncommon today. Perhaps conference calling, videoconferencing, and instant messaging can help you bridge the gap.