Can a C2C Contractor Claim Travel Expenses?

Independent contractors operating under a Corp-to-Corp (C2C) model often question the deductibility of travel expenses incurred on client projects. This article clarifies how C2C contractors can claim travel expenses, outlining the specific rules and requirements for tax compliance and maximizing legitimate business deductions.

Understanding C2C and Business Expenses

C2C, or Corp-to-Corp, is a business arrangement where an independent contractor operates as their own incorporated entity, such as an S-Corporation or a C-Corporation, rather than as a sole proprietor or a direct employee. Under this model, the contractor’s company contracts with another company to provide services. The contractor’s corporation is the legal entity responsible for tax obligations and for incurring and deducting business expenses.

This corporate framework influences how business expenses, including travel, are handled. Unlike a W-2 employee whose employer manages tax withholdings and often reimburses expenses, a C2C contractor’s corporation is solely responsible for identifying, tracking, and deducting all eligible business costs. The corporation, not the individual, is the taxpayer in this context.

General Rules for Deducting Business Travel

The Internal Revenue Service (IRS) permits the deduction of business travel expenses if they are “ordinary and necessary” for the trade or business. An ordinary expense is one common and accepted in the industry, while a necessary expense is helpful and appropriate for the business. These expenses must be incurred while traveling “away from home” for business purposes.

The concept of a “tax home” is central to determining whether travel expenses are deductible. Your tax home is generally the entire city or general area where your main place of business or employment is located, irrespective of where your personal residence is. If you work in multiple locations, your tax home is typically where you spend the most time, conduct the most business activity, and generate the most income.

Travel expenses are deductible when you are away from your tax home for a period substantially longer than an ordinary workday, requiring sleep or rest to meet the demands of your work. Deductible travel expenses include transportation costs like airfare, train, bus, or car travel between your tax home and business destination. This also covers fares for taxis or other local transportation at your destination.

Lodging expenses incurred while away from your tax home are also deductible. Meal expenses are generally deductible, subject to a 50% limitation, and you can either deduct the actual cost or use a standard meal allowance. Other deductible costs may include dry cleaning, laundry, business calls, and tips related to these expenses.

Applying Travel Expense Rules to C2C Engagements

The general rules for business travel expenses apply to C2C contractors, with emphasis on defining the contractor’s “tax home” and the nature of their work assignments. For C2C professionals, their tax home is typically the main office of their corporation, or where they regularly perform their primary business activities. This might be a home office or a dedicated co-working space.

A key distinction for C2C contractors is between “temporary” and “indefinite” work assignments at client sites. Travel expenses to a client location are deductible only if the assignment is considered temporary. An assignment is generally deemed temporary if it is realistically expected to last, and does last, for one year or less.

If a work assignment at a single location is realistically expected to last for more than one year, or if there is no realistic expectation that it will last one year or less, it is considered indefinite. In such cases, that client location becomes the contractor’s new tax home, and travel expenses to and from that site are not deductible. For example, if a C2C contractor lives in one city but works at a client’s office in another city for a period expected to exceed one year, the client’s city becomes their tax home, disallowing travel deductions.

If an initial assignment is temporary but later extended beyond one year, the travel expenses incurred during the initial temporary period remain deductible. Once the expectation changes and the assignment becomes indefinite, subsequent travel expenses are no longer deductible. This “one-year rule” is important in determining the deductibility of ongoing travel for C2C contractors.

Maintaining Proper Records for Travel Expenses

Comprehensive record-keeping is essential for C2C contractors to substantiate business travel expense claims. The IRS requires detailed records to prove the amount, date, place, and business purpose of each expense. Maintaining clear, contemporaneous records helps ensure compliance and can be vital during an IRS audit.

For each travel expense, contractors should keep receipts, invoices, or other supporting documents. These records should show the cost of separate expenses for travel, lodging, and meals. While receipts for individual expenses under $75 (excluding lodging) might not always be strictly required, it is prudent to retain them when possible.

In addition to financial documents, records should include the dates of departure and return for each trip, the number of days spent on business, and the destination or area of travel. A clear explanation of the business purpose or benefit gained from the travel is also necessary. For vehicle use, a mileage log detailing dates, destinations, business purpose, and miles driven is crucial.

Contractors can utilize various methods for record-keeping, including digital apps, spreadsheets, or physical files. Regardless of the method, the records must be organized and readily accessible. It is advisable to retain tax records, including travel expense documentation, for at least three years from the date the tax return was filed.