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.
A taxpayer who travels to a destination and 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.
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:
Total days outside of US 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 Henssler Financial at 770-429-9166 or [email protected].