Travel does not necessarily need to involve the actual conducting of business to qualify as a business trip.
Summer is well underway, and you may be considering combining a business trip with vacation plans, or may have already traveled for both business and pleasure purposes. Although business is business and pleasure is pleasure, the tax code does not always adhere to absolutes or logic. With a little planning, improved tax deductions may be available for out-of-town business-travel expenses, both domestically and internationally. Wouldn’t it be nice to be able to check out the Grand Canyon after that business convention in Phoenix, or the Mayan ruins after that business meeting in Belize? This Alert discusses a few strategies to help you achieve the greatest tax benefit from properly combining and documenting business and personal travel.
Combine Business and Vacation Domestic Travel
When some vacation days are added onto a business trip within the United States, business-travel expenses are typically deductible. Transportation expenses are deductible for out-of-town business trips. This includes travel to and from the departure and destination airports; cab fares; the airfare itself; baggage fees and tips; and so forth. Costs of rail travel or driving a personal vehicle also fit into this category. The bottom line: Domestic transportation costs are 100 percent deductible, as long as the primary reason for the trip is business rather than pleasure. On the other hand, if vacation is the primary reason for travel, no transportation expenses are deductible.
Although the Internal Revenue Service does not specify how to determine if the primary reason for domestic travel is business, the number of days spent on business versus pleasure is a determining factor. Travel days count as business days, as do weekends and holidays if they fall between days devoted to business, making it impractical to return home. “Standby days,” when physical presence is required, but work is not necessarily performed, also count as business days. Any other day principally devoted to business activities during normal business hours is also counted as a business day, as are days when work was expected but not possible, due to reasons such as local transportation difficulties, power failures, etc. Additionally, a businessperson who is on an extended travel assignment may deduct the cost of a weekend trip home up to the amount the individual would have spent on lodging and meals at the out-of-town business location.
Travel does not necessarily need to involve the actual conducting of business to qualify as a business trip. If the primary purpose of a trip is to attend a convention or seminar, travel expenses are deductible if attendance benefits or advances your trade or business. It is essential to save all material helpful in establishing the business or professional purpose of the travel, as the IRS, upon audit, often reviews the nature of the meeting carefully to ascertain they are not vacations in disguise. Attendance at conventions primarily serving political, social or other personal purposes are nondeductible.
For domestic trips, business will likely be considered as the primary reason for a sojourn whenever the business days exceed the personal days. You may want to accumulate and maintain proof by logging everything in a daily planner. With current technological advances, a variety of helpful smartphone apps, such as Expensify, can be used to assist you with importing expenses and tracking mileage. For those using company credit cards, Zoho integrates well with most major credit card issuers worldwide. Smartphone apps are a great way to stay organized while eliminating hassle.
No deductions are allowed for a spouse, dependent or other individual who accompanies the taxpayer or employee on a business trip unless such person is an employee of the person who is paying or reimbursing the expenses, the travel of such person serves a bona fide business purpose and the expenses of such person are otherwise deductible. While the rules on deducting costs for an accompanying spouse are restrictive, it can still be worthwhile for a spouse to tag along on a business trip. An individual’s deduction is based on what it would have cost to travel alone, as opposed to simply 50 percent of the total trip expenses. Therefore, if a hotel room costs $300 for one occupant and $425 for two, you may deduct $300 of the $425 total expense. Likewise, you can deduct 100 percent of car rental fees and other similar expenses, such as ride-sharing and taxi fares, when joined by a spouse, as these expenses would have been the same had the spouse not accompanied the taxpayer.
Once at the destination, out-of-pocket expenses for business days are fully deductible. Out-of-pocket expenses include lodging, hotel tips, seminar and convention fees and cab fare. Your meals (subject to the 50 percent disallowance rule) during business days are also deductible, even if they are “personal,” i.e., not connected with business. No deduction is allowed for meals or lodging expenses deemed lavish, extravagant or unreasonable. Expenses for personal days are nondeductible, except in the “Saturday night stayover” situation explained below.
Maximizing the Tax Benefits of a Saturday Night Stay
An effective strategy for maximizing deductions of the personal portion of a trip is with a Saturday night stay. This occurs when a taxpayer reduces the overall cost of his/her trip by extending a stay at the travel location in order to take advantage of lower return airfare rates. It must be shown that staying the extra day or two costs less than returning home immediately after the business meeting is over. The IRS has ruled (Private Letter Ruling 9237014, dated June 10, 1992) that under a “common sense test,” a hardheaded businessperson would do the same and, thus, allows the deduction of the additional meals (subject to the 50 percent disallowance rule) and lodging expenses for the extra day(s) as ordinary business expenses. Naturally, this is applicable only if a dominant business purpose for the trip exists. It is prudent to document that airfare savings exceeded the out-of-pocket costs of staying the extra day(s) and to maintain the documentation.
Deducting Foreign Travel Costs
When traveling outside the United States primarily for business reasons, the travel expenses, as a general rule, including transportation, must be allocated between business and personal expenses. However, transportation expenses as well as other out-of-pocket business expenses can be deducted in full if the trip is primarily for business and either of the following exceptions is satisfied:
- The one-week rule. The business trip is one week or less, excluding the departure day, but including the day of return. One week means seven consecutive days.
- For example, a businessperson leaves the United States for a business trip on a Thursday, returning the following Thursday. As the taxpayer was not away from home for more than seven consecutive days, the taxpayer’s transportation expenses, as well as other out-of-pocket business expenses, are deductible in full.
- The 25 percent rule. Transportation and other out-of-pocket business expenses can also be deducted in full for trips lasting more than a week, as long as less than 25 percent of the trip is attributable to personal activities. For this purpose, include the day of departure and day of return as business days, as long as the travel is to or from the business destination. Generally, the allocation between business and personal time must be made on a day-by-day basis. Expenses allocable to personal days are not deductible.
- For example, a businesswoman flies from Boston to London, England, where she spends 15 days. She then takes a four-day vacation in London before returning to Boston. The trip, in its entirety, lasted 21 days, including two travel days. Since the four personal days were less than 25 percent of the 21 days, out-of-pocket travel expenses are fully deductible.
In addition to the two exceptions above, foreign travel qualifies for a full deduction if the taxpayer does not have substantial control over arranging the trip. A taxpayer does not have substantial control if the individual is an employee who was reimbursed or paid a travel-expense allowance arrangement and the individual is not a managing executive of the company or related to the employer. Finally, in a catchall provision, 100 percent of transportation costs to and from foreign destinations are deductible if it can be proven that a personal vacation was not a major consideration in choosing to make the trip.
If transportation expenses are not deductible under any of the above exceptions, the business percentage of transportation costs are still deductible—assuming the trip is primarily for business. To calculate the business percentage, divide the days spent principally on business activities by the total number of days outside the country, counting departure and return days. The travel days count as business days, just as the other types of days are considered business days for purposes of the one-week rule and the 25 percent rule.
Travel to Attend International Conventions
If the reason for a trip outside North America is to attend a business convention directly related to the active conduct of a trade or business, the trip may qualify for deductions. However, all of the foreign travel rules discussed above must be followed, and it must be proven that it was just as reasonable for the meeting to be held on foreign soil as in North America and that the time spent in business meetings or activities was substantial when compared to that spent sightseeing and engaging in other personal activities. Regardless of the location, travel costs to attend investment- or financial-planning, political or social conventions and seminars are not deductible.
Fortunately, the tight rules for foreign conventions are inapplicable in many cases because the definition of “North America” for this purpose is very liberal. It includes Canada, Mexico, Puerto Rico, U.S. Virgin Islands, American Samoa, Northern Mariana Islands, Guam, Marshall Islands, Micronesia, Palau, Netherlands Antilles, Bahamas, Aruba, Antigua, Barbuda, Barbados, Bermuda, Costa Rica, Dominica, Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Panama, Trinidad and Tobago, Midway Islands, Palmyra Atoll, Baker Island, Howland Island, Jarvis Island, Johnston Island, Kingman Reef and Wake Island.
Conventions on Cruise Ships
Deductions related to conventions directly related to the active conduct of a trade or business that are held aboard cruise ships are limited to $2,000 per individual per calendar year. In addition, the ship must be a U.S.-registered vessel, and all ports of call must be in the United States or its possessions. Finally, the following information has to be attached to the taxpayer’s return in the year the deduction is claimed:
- A signed statement showing the total days of the trip (excluding travel to and from the ship), the number of hours each day spent attending scheduled business activities and the program of the convention’s scheduled business activities.
- A statement signed by an officer of the sponsoring organization that includes a schedule of each day’s business activities and the number of hours the taxpayer spent attending those activities.
Entertainment Expenses After Tax Reform
The Tax Cuts and Jobs Act (TCJA) repealed the deduction for entertainment, amusement or recreation expenses that are directly related to or associated with the active conduct of the taxpayer’s trade or business. The tax code expressly disallows a deduction for any activity or facility, which is of a type generally considered to constitute entertainment, amusement or recreation. Now more than ever it is more important to track your business meals, travel and lodging, which are deductible, as a separate expense detached from any event or facility that is generally considered an entertainment expense, which is not deductible.
For example: You attend a business convention at a golf course in 2018. The travel and lodging expenses related to getting to the business convention are still deductible as discussed above. During your stay, you make a connection and invite your prospect out to lunch and a round of golf. Your lunch is still deductible; however, the round of golf is no longer a deductible expense. To complicate this scenario, if the hotel package you purchased for the convention included a round of golf, the value of the round of golf is treated as entertainment and must be distinguished from the lodging expense as a separate nondeductible item.
The TCJA (which we wrote about after it initially passed and further analyzed the implications on tax returns) did not change any of the travel or lodging expense related deductions discussed in this Alert. The meal deduction was also largely preserved at the 50 percent limitation while traveling away from home on business and certain other business-related meals.
Regardless if travel is strictly business-related or a combination of business and vacation, it is prudent to be thorough and complete in maintaining documentation that clearly establishes the business purpose of the travel, as the burden of proof is on the taxpayer. The greater the documentation, the larger the tax savings.
For Further Information
For travelers who prefer recording their mileage and expenses offline, TAG has an Excel-based business travel log available upon request. If you would like to receive this tool, or for more information on the complexities addressed in this Alert or your own unique situation, please contact Gregory G. Smith, CPA, Steven M. Packer, CPA, or the Tax Accounting Group practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.