Q: A colleague who owns a small, home-based travel agency told me that the IRS is challenging all the travel expenses claimed on his tax return. That struck fear into me because, like everyone else I know who sells travel, I deduct my travel expenses against my travel business income. After all, I travel to learn about destinations and travel suppliers, such as airlines and resorts. Those expenses enable me to better advise clients, and my reputation and income are thus enhanced. Shouldn't those travel expenses be deductible?
A: In my opinion, they should be deductible for the reason that you cite, but my opinion does not count for anything. What counts are the IRS regulations governing travel-expense deductions.
Those regulations have no special category for travel advisors. Therefore, you have to rely on the rules for travel-expense deductions for all businesses. Unfortunately, those rules are stricter for travel and entertainment expenses than they are for any other kinds of business expenses.
Under the IRS regulations, you have to "substantiate" your travel expenses. To do so, you must keep "adequate records" to determine: (1) the amount of the expense; (2) the time and place it was incurred; and (3) the business purpose of the expense.
To meet these three requirements, you must maintain an "account book, diary, log, statement of expense, trip sheets or similar record" and "documentary evidence, such as receipts, paid bills or similar evidence."
On top of these requirements, there are additional requirements for travel abroad, land-based meetings and convention travel, cruise-ship meetings and convention travel and accompanying-spouse travel.
One more thing: If your travel expenses are high in relation to your income as an advisor, and if the latter is low, you run the risk of having all the expenses classified as nondeductible hobby losses. So, you need to make sure that you earn a good deal more than you spend on travel.
According to my research, there has never been a court case in which a travel advisor successfully asserted that travel expenses were incurred in pursuit of destination knowledge or the like. In all such cases, the court never reached the merits of the destination-knowledge argument because the travel agent failed to keep adequate records under the regulations, thus disqualifying him from deducting anything. Perhaps, one day, there will be a favorable precedent.
In the meantime, I have no doubt that many self-employed travel advisors are also deducting their travel expenses and just not getting caught by the IRS, as the odds of being audited are very small today. President Biden wants to beef up IRS enforcement, so those odds may change a lot in the years ahead.
However, now that you know the rules, you may win a future audit by following them closely.
Finally, keep in mind that I'm not a tax-law expert or a tax accountant, and I can only tell you the rules based on my research. If you have specific questions, you need to ask a tax professional.