Can a W2 owner-employee deduct travel expense

Question of the week – Travel Expense
From Tax Research Institute of H&R Block – June 2022
Q. Mack and Ginny own and operate Foodie Cookies, a specialty bakery that makes
and sells a variety of gourmet cookies in our area. Customers can buy cookies in the
store or order online and arrange for pick-up or home delivery. The bakery opened in
2018 and has actually thrived during the pandemic. They are now hoping to expand the
business to new locations in the metropolitan area and possibly elsewhere in the region.
To that end they have already made a few road trips, one of them out-of-town, to scope
out possible locations. They paid for their gas, food, hotel, etc. out-of-pocket.
Can they deduct their travel expenses? If so, where would they deduct the
expenses? They organized Foodie Cookies as an S corporation and Mack and Ginny
are the only shareholders. They receive salaries and the business pays for their health
insurance. The business reports these items on their Forms W-2.
A. As shareholder-employees, Mack and Ginny cannot deduct their out-of-pocket travel
expenses. Under the TCJA, unreimbursed employee business expenses, as well as
other “2%” miscellaneous itemized deductions, are not deductible 2018 through 2025.
Going forward, the business can adopt an accountable plan to reimburse Mack and
Ginny for ordinary and necessary business expenses. Using an accountable plan An
accountable plan has three requirements:
• Business connection. The plan reimburses employees for ordinary and necessary
business expenses in connection with their performance of services for the employer.
• Substantiation. Employees must keep records of their expenses. • Return of excess.
Employees must return any excess reimbursements to the employer. Applying these
requirements to your clients, Mack and Ginny must keep adequate records of their
expenses such as mileage logs, parking and tolls, and receipts for overnight travel
expenses such as hotels and meals. Their records should show the business purpose
of each expense or trip. As business owners, they can decide whether to reimburse
actual travel expenses or use per diems. See “Reimbursement of travel and nonentertainment
related meals” in IRS Pub. 535, Business Expenses.
Keep in mind that all rules and limitations for deducting transportation and travel
expenses apply. The same rules will apply in the future if they end up opening and
visiting new sites to check on operations. For instance, if Mack or Ginny spends the day
at a new location in their metropolitan area, they cannot deduct mileage or other.