When
a taxpayer's trip is undertaken solely for business reasons, all "reasonable and
necessary travel expenses" including fares, lodging, meals (subject to the 50%
disallowance rules) and incidental expenses are deductible.
Travel
often has both business and personal aspects. As always, the facts and circumstances
are the determining factor (or what I usually call the "it depends" rule).
One
set of rules applies to domestic travel and another set applies to foreign travel.
Domestic Travel
A taxpayer who
travels to a destination, and while at that destination engages in both business
and personal activities, may deduct traveling expenses to and from the destination
only if the trip is primarily related to his trade or business. If the trip is
primarily for pleasure and you conduct some business while at the destination,
the cost of getting to and from the destination are personal (nondeductible).
Expenses directly related to the business activities — such as meals and entertainment,
cab fares, etc. — are deductible.
Whether
a trip is business or personal depends on the facts and circumstances. The amount
of time spent on business activities compared with the amount spent on personal
activities is an important factor. However, time is only one factor to consider
and may not be the dominant factor. If the taxpayer would not have taken the trip
unless there were business reasons, he or she may have an argument that the trip
is primarily business.
Foreign
Travel
If the taxpayer
travels outside the United States on business and either extends the stay for
personal reasons or makes personal side trips, the treatment of the travel expenses
depends on (1) how much of the trip was business related and (2) whether the trip
is "deemed" entirely for business.
Foreign
Travel Entirely for Business — Safe Harbor Rules
If
foreign travel is deemed entirely for business, deductible travel expenses include
the costs of getting to and from the business destination and business related
expenses while there. Personal expenses are not deductible. Travel is deemed entirely
for business if any of the safe harbor exceptions are met:
- No more than seven consecutive days are
spent outside the United States. The day of departure is not counted, but the
day of return is included. If you keep the business trip to a week or less, 100%
of the transportation costs and 100% of other costs (subject to the 50% limitation
on meals and entertainment) are deductible. Out-of-pocket expenses on personal
days are not deductible.
- Less than
25% of the total time on the trip is devoted to non-business activities, including
both the day of departure and the day of return.
- The
taxpayer has no substantial control over trip arrangements. An employee does not
have substantial control unless they are a managing executive or related to the
employer.
- The taxpayer proves the
personal vacation was not a major consideration. This test applies if the taxpayer
is self-employed, related to the employer or a managing executive.
Foreign
Travel Primarily for Business
If
the travel is primarily for business but does not satisfy one of the safe harbor
rules, the cost of getting to and from the destination must be allocated between
business and personal:
Number of Business Days
Total Days Outside U.S.
Including days of
departure
and return | X
Cost of Travel = Business Deduction |
If
you are at a particular place for a bona fide business purpose, or if the principal
activity is business related, it is considered a business day. Weekends and holidays
are business days if they fall between business days.
Foreign
Travel Primarily for Personal Reasons
If
the trip is primarily for personal reasons, the travel costs of getting to and
from the destination are not deductible. Expenses directly related to business
are deductible.
Addendum:
Travel Expenses of Investors
Travel
expenses related to the "production or collection of income" are deductible if
the taxpayer provides substantiation.
For
instance, if you own rental property in a location away from your tax home, it
may be necessary to check on that property and/or make or arrange for necessary
repairs and cleaning.
The
expense of attending investment seminars is specifically excluded in the IRS code
as a deductible expense under the production of income provision, as opposed to
the trade or business expense provision. This means that if your trade or business
is investment related, you could deduct this travel expense.
Travel
expenses to attend stockholder meetings are permissible deductions if travel is
not for personal reasons and expenses are reasonable in relation to the value
of the investment. In other words, owning several hundred shares of Ford stock
will not get you a deductible trip to Detroit. The taxpayer-investor, who only
has a relatively small amount of stock and who fails to present any substantial
evidence that the expenses incurred are really for the production of income or
maintaining or improving the value of his stock, may not be permitted to deduct
his related expenses. For more information contact The Henssler Financial Group Tax & Accounting Division at (770) 428-4025.
