Mark Pestronk
Q: I am a self-employed travel advisor. The IRS has notified me that it has disqualified all of my personal travel deductions. The IRS auditor claimed that my business is really just a hobby and that no deductions are allowed for hobbyists. I think that this is very unfair because my travel enables me to provide better advice to my clients. Do you have any advice for me?
A: I certainly agree that if you are in the business of advising clients about leisure or business travel, you ought to be able to deduct all expenses that will enable you to offer better advice. However, my opinion is not going to help you, so you need to consult an attorney who specializes in business taxation.
In my experience, the problem with travel deductions is not that they are illegitimate. It is that the taxpayer fails to meet the tough record-keeping and other substantiation requirements of the law.
You must keep "adequate records or by sufficient evidence corroborating the taxpayer's own statement, [by showing] each of the following elements: (1) the amount of each separate expenditure; (2) the dates of departure and return and the number of days spent on business; (3) the place of destination by name of city or town; and (4) the business reason or expected business benefit from the travel."
Even tougher rules apply to records for foreign travel of more than one week, cruises abroad, meetings on cruise ships, entertainment and meals. You may be able to comply with them if you know them and are a careful record keeper.
In addition to keeping adequate records, you should strongly consider operating your business through your own corporation or limited liability company and then filing corporate tax returns for your business. At the federal level, this means filing a Form 1120 or 1120S instead of listing personal travel expenses on Schedule C of your Form 1040.
There are two advantages to being set up this way. First, you are much less likely to be audited because of your deductions, and second, you are likely to appear more professional to an auditor.
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Update: A Legal Briefs column early this year, "A new hurdle for small businesses to clear," covered the new federal Corporate Transparency Act, which required businesses with fewer than 20 employees file a list of "beneficial owners" with the Financial Crimes Enforcement Network by no later than Jan. 1, 2025. Then, in early March, a federal judge held that the law is unconstitutional, but the government took the position that the injunction was limited to the parties in the case.
On Dec. 3, another federal judge expressly extended a new injunction nationwide. This means that you do not have to comply with the law, at least for the time being. It is possible that a court of appeals will lift the injunction, but I wouldn't count on it, since the case would go to the most conservative federal appeals court. Even if the filing requirement is reinstated, there would be a new filing deadline in the future.