Mark Pestronk
Q: With all the publicity about tax reform under the One Big Beautiful Bill Act, I am wondering if you have seen anything new about the tax deductibility of travel expenses. Even if you haven't, can you briefly review what I, as a self-employed travel advisor, have to do to make sure that my travel expenses will pass muster as a business deduction with the IRS? One more question: Under the bill, tip income is not taxable, so if I tell clients that my service fee is a voluntary payment, can it qualify as a tip?
A: Travel-expense deduction rules remain unchanged. What you can deduct is still quite limited, and the proof rules remain tough.
Unfortunately, to get any travel-expense deduction, a self-employed travel advisor (or a travel agency paying the bills) still must keep detailed contemporaneous records showing the amount, time, place and business purpose of each expenditure; clear separation of business and personal expenses; and avoidance of estimates.
These rules are harsher than any other business deduction rules that I know of. They appear to reflect the suspicion of the congressional drafters and IRS enforcers that travel is mostly a junket and not a professional education experience.
In addition to the proof requirements, you also need to be engaged in a real business and not just a hobby. So, if you are a Schedule C filer and your business travel expenses exceed your travel business income, you probably can't get away with any deduction.
For cruises, even stricter rules apply. You have to maintain a contemporaneous written statement detailing the business activities conducted each day on the cruise, and you have to keep records of the number of hours spent on business activities each day. Spouse or partner expenses don't qualify, unless the they are an employee of the business and the travel serves a real business purpose.
I realize that many travel advisors deduct the entire cruise or other trip cost as a necessary expense in order to be more knowledgeable in their profession, and continuing education expenses inside one's profession are always deductible. This argument makes perfect sense to me, but unfortunately, there are no court cases or IRS rulings that agree with this position, chiefly because the taxpayers failed to substantiate the expenses correctly.
In one United States Tax Court case from 2015, Lee v. Commissioner, the court not only disallowed all of the travel agent's travel deductions because of a lack of substantiation but also imposed a penalty equal to the greater of 10% of the tax due or $5,000. My best advice for you is not only to follow the substantiation rules, but to review your proof for each kind of travel with your tax advisor before you file your tax return.
As for your tipping question: The IRS has tentatively published a list of 68 occupations that the no-tax-on-tips law will apply to. Travel advisor or travel agent is not one of those occupations. "Travel guide" is one of the 68, but you may have a hard time persuading the IRS that you qualify as a guide.