Note that this article doesn’t cover some of the more specialized rules, such as those that apply to travelers in the transportation industry, or the per diem reimbursement rules.
Domestic Business Travel Rules
Deductions for trip undertaken primarily for business. A taxpayer who mixes a bit of pleasure with business while away from home nonetheless may deduct all of the round-trip transportation costs as long as the trip was undertaken primarily for business reasons. The cost of lodging plus 50% of meals for the days doing business is deductible. Additionally, if the traveler is an employee who is reimbursed for his business travel expenses under an accountable plan that requires a timely accounting of the time, place, and business purpose of the travel, plus receipts, the reimbursement is tax-free to the traveler.
HATS observation: In effect, the 100% deduction for the round-trip travel costs works as a kind of tax subsidy for a personal vacation, or as a partially tax-free perk.
HATS illustration 1: Kevin, a self-employed information technology specialist, flies from the East Coast to Los Angeles for a 5-day business trip. He takes in three days of vacation and sight-seeing after the business part of the trip is over.
Result: Because Kevin can deduct the entire airfare, part of his mini-vacation is, in effect, subsidized by the tax break.
HATS illustration 2: The facts are the same as in illustration (1), except that Kevin is employed by a corporation that reimburses him for the business portion of the trip after he submits detailed records and receipts. He pays for the personal portion of the trip (meals and lodging during the three personal days) and is not reimbursed for those expenses.
Result: Under the accountable plan rules, the reimbursement for the round-trip airfare (as well as for meals and lodging while on business status) is tax-free to Kevin, and is not subject to FICA or income tax withholding. That’s true even though he took a mini-vacation after his business trip ended. The corporation deducts the travel costs it pays (but only 50% of the cost of meals is deductible per IRS rules on entertainment/meals expenses).
HATS illustration 3: The facts are the same as in illustration (2), except that the corporation reimburses Kevin for the cost of the entire trip, including the 3-day mini-vacation.
Result: Kevin’s cost for the personal portion of the trip consists of the tax he pays on the personal portion’s value (hotel, meals, etc.), which must be treated as compensation income. The corporation’s deduction consists of 50% of the meal costs while Kevin is on business travel status, 100% of the round-trip airfare, 100% of the lodging costs while he is on travel status, and 100% of the cost of the mini-vacation since that is treated as compensation paid to Kevin.
When is a trip treated as undertaken primarily for business? There is no hard-and-fast rule. It depends on the facts and circumstances of each case. The regulations do say, however, that the way travelers split their time between business and personal pursuits is “an important factor.”
HATS illustration 4: Mary works in Atlanta and travels to New Orleans on business. On her way, she stops in Mobile to visit her parents. During the nine days she is away from home, she spends $2,165 for travel, meals, lodging, and other travel expenses. Had she not stopped in Mobile, Mary would have been away from home for only six days and her trip would have cost only $1,860.
Result: Mary can deduct $1,860 for her trip, including the cost of round-trip transportation to and from New Orleans. The 50% deduction limit applies to her meals while on business status.
HATS observation: As is evident from illustration (4), the personal part of a trip need not occur at the business destination. It can also take place en route to (or on the way home from) the business destination.
HATS caution: Taxpayers who make a stop for personal reasons en route to a business location or on the way home should be sure to keep records of what their round-trip transportation costs would have been without the personal stop.
Saturday night stayovers. Although an employee’s out-of-town business chores conclude on Friday, he may extend his business trip to take advantage of a low-priced fare requiring a Saturday night stayover, where the savings in airfare are higher than the costs of the weekend meals and lodging. IRS ruled that under a “common sense test,” the meal and lodging expenses payments to the employee for the Saturday stay were deductible if a “hardheaded business person would have incurred such expenses under like circumstances.” Assuming the payments were made under an accountable plan, the employee wouldn’t have to pay tax on the reimbursement for his Saturday meal and lodging expenses.
HATS observation: Although the above ruling dealt with an employment situation, the same reasoning should apply to a self-employed individual who extends a business trip to take advantage of the lower airfare.
When a personal day may not be a personal day. An away-from-home business trip may straddle a weekend. For example, a traveler may have to attend business meetings on Thursday, Friday, and Monday. He is too far away to travel home and then come back (and besides, the trip back and forth would cost more than staying put), so he spends the weekend relaxing at the out-of-town location. Because he must remain at the location for business reasons, the weekend days (Saturday and Sunday) should, under the “common sense test,” be treated as business days the expenses for which are deductible (50% of meal costs, 100% for other expenses) and excludible by a traveler who is reimbursed under an accountable plan. Note that in the context of foreign travel, the regulations treat such standby days as business days.
Tax break for weekend travel home. A business traveler on an extended out-of-town assignment may decide to fly home for a weekend to be with family or friends. The cost of the weekend trip home is deductible up to the amount the traveler would have spent on meals and lodging at the out-of-town location. Note, however, that this rule applies only if the traveler checks out of the out-of-town hotel before leaving for the weekend trip home, and then re-registers. If the traveler retains the hotel room, its cost is deductible, but the deduction for the weekend trip home (i.e., the airfare) is limited to what the traveler would have spent on meals during the weekend at the out-of-town location.
Tax breaks when spouse or companion comes along. The expenses of a spouse or other companion accompanying a traveler aren’t deductible unless (1) the spouse or other companion is an employee of the taxpayer and travels for a bona fide business purpose, and (2) the expenses would otherwise be deductible by the spouse or other companion. Nevertheless, even if the spouse’s or other companion’s travel expenses aren’t deductible, a tax benefit may still be salvaged from traveling together. That’s because the business traveler’s deduction isn’t based on 50% of the trip expenses. The deduction is based on what it would have cost the taxpayer to travel alone. This rule can be a money saver on accommodations. For example, where the cost of a hotel room is $149 for one occupant and $200 for two, a taxpayer on business status may deduct $149 per night, not $100, when he gets a room for two.
Similarly, where the taxpayer travels out of town on business via rental car, and his spouse or other companion accompanies him for nonbusiness purposes, the entire cost of the rental is deductible, because the cost would have been the same for the taxpayer even if his spouse did not join him on the trip.
Foreign Business Travel Rules
The foreign business travel rules diverge from those for domestic business travel when the taxpayer undertakes a trip primarily for business reasons, but also takes some personal days while abroad. In this situation, the transportation expenses are fully deductible-despite the personal days-if one of four tests, explained below, are met. If none of the four tests are met, transportation expenses must be allocated under special rules between (deductible) business and (nondeductible) personal activities.
HATS observation: The allocation rules for foreign business travel apply only to transportation expenses-the cost of getting there and back. The other costs are subject to the usual rules: lodging expenses and 50% of meals while on business status are deductible (and are tax-free to a traveling employee if the accountable-plan rules are met). Purely personal expenses are nondeductible by a self-employed taxpayer or an unreimbursed employee, may be deductible as compensation by an employer that reimburses the expenses, and are taxed to a reimbursed traveler.
Fully deductible foreign transportation costs. When an individual goes on a foreign business trip, the full cost of the round-trip transportation is treated the same way as for a domestic business trip as long as the travel meets any of the following four tests.
HATS observation: This means that the entire cost of the round-trip transportation is deductible (and tax-free to an employee if the accountable plan rules are met) even if some vacation time is taken at the foreign destination.
Test #1-no substantial control over arranging trip. To meet this test, the traveler must have no substantial control over arranging the trip outside the U.S., considering all the facts and circumstances. An employee who travels outside the U.S. for his employer under a reimbursement or other expense allowance arrangement is considered not to have substantial control over arranging the trip if he isn’t a managing executive of the employer (someone who can make his own travel plans and doesn’t need someone else’s OK), or related to the employer, but using a 10% test). Just because a person can control the timing of the trip doesn’t mean he has substantial control.
A self-employed person generally can’t meet the “no substantial control” test.
Test #2-away one week or less. This test is met if the traveler is outside the U.S. for a week (seven consecutive days) or less. For purposes of this test, the day of departure from the U.S. isn’t counted, but the day of arrival back in the U.S. is counted.
When figuring the 1-week period, any travel between U.S. points is not counted. For this purpose, the “U.S.” is defined as the 50 States and the District of Columbia.
HATS illustration: Bob lives and works in Denver and takes a business trip to Paris. Bob leaves Denver on Tuesday and flies to New York. On Wednesday, he flies nonstop from New York to Paris, arriving the next morning. He has business meetings on Thursday, Friday, and Saturday and sightsees from Sunday until Tuesday. He flies back to New York, arriving Wednesday afternoon. On Thursday, he flies to Denver. Result: the cost of the round trip from Denver to Paris is deductible. Bob was away from Denver for more than a week. But because the day of departure doesn’t count, and because the travel between U.S. points doesn’t count, Bob was outside the U.S. for exactly seven days.
Test #3-less than 25% on personal matters. Even if the foreign trip lasts longer than one week, there’s no allocation of round-trip transportation costs if less than 25% of the time outside the U.S. was spent on personal matters. Here, the travel days-both the day of departure from the U.S. and the day of return to the U.S.-are counted.
When applying this test, any travel between U.S. points is not counted. Similar to the above, for this purpose, the “U.S.” is defined as the 50 States and the District of Columbia.
Test #4-vacation not a major consideration. Even if one of the three other tests doesn’t apply, a full deduction for foreign transportation cost is still available if the taxpayer can show that vacationing was not a major consideration in making the trip, even if the traveler has substantial control over arranging the trip.
HATS illustration: John, chief executive officer of International Co., Inc., must fly to Frankfurt to meet with German regulators. He spends a week on business, plus four days on vacation. His round-trip transportation costs, plus meals (at 50%) and lodging during the business days, may be deductible.
Partially deductible foreign transportation costs. If foreign travel doesn’t meet one of the four full-deductibility tests, above, the nondeductible portion of the transportation expenses-the cost of getting there and back-generally is determined by using a day-to-day allocation formula. Under this formula, total travel expenses are multiplied by the ratio of the total number of non-business days spent outside the U.S. to the total number of days spent outside the U.S. For purposes of this allocation, the days of departure from, and return to, the U.S. generally are treated as business days spent outside the U.S.
HATS illustration: Ruth, a partner in an international law firm based in New York, takes a business trip to Zurich. She spends seven days on business and seven days skiing, and her round-trip air-fare cost is $1,600. Test #3 doesn’t apply because she spends more than 25% of her time on personal matters. If Ruth isn’t protected by either Test #1, Test #2, or Test #4, she determines the nondeductible part of her transportation cost as follows: 7 personal days ÷ 14 total days × $1,600 = $800. The cost of the 7-day business stay (lodging, 50% of meals) is deductible; the cost of the personal stay is not.
While the nondeductible part of foreign travel costs is generally determined under the above formula, the regulations allow taxpayers to use other allocation formulas if they more clearly reflect the period of foreign travel attributable to personal matters.
Special rules apply where the pleasure part of a trip is not located at or near the foreign location where business is transacted. If the pleasure part of the trip takes place beyond the business destination, then the airfare to be allocated in part to business travel and in part to personal travel is figured on the basis of a round trip from the U.S. location to the business location.
HATS illustration: Henry, a 20% shareholder-employee of U.S. Co., Inc., schedules a 5-day business trip to London from New York. From London, he proceeds to Paris for a 13-day vacation. U.S. Co. reimburses him for the entire trip after he accounts in full for the expenses. The round-trip cost from New York to London is $1,000.
Roughly $278 of the New York-to-London air fare (5/18ths of $1,000) is tax free. So is the cost of 50% of his meals and all of his lodging while in London. The balance of the airfare, and the cost of his meals and lodging in Paris, are taxable to him as compensation income. U.S. Co. treats the business part of the air fare ($278) and the London meals (at 50%) and lodging costs as deductible business expenses. The balance of the corporation’s cost is deductible as compensation (assuming the executive’s total compensation package is “reasonable”).
If the pleasure part of the trip takes place en route to or from the business destination, then the allocation of the nondeductible airfare is figured on the round trip from the U.S. departure point to the non-business destination.
HATS Illustration: Alice, a New Yorker, flies to Paris on August 4 to attend a business conference that begins on August 5. The conference ends at noon on August 14. That evening she flies to Dublin where she visits with friends until the afternoon of August 21, when Alice flies directly home to New York. The primary purpose for the trip is to attend the conference. If Alice did not stop in Dublin, she would arrive home the evening of August 14. She doesn’t qualify for any of the exceptions that would allow her to consider her travel entirely for business.
August 4 through 14 (11 days) are business days and August 15 through 21 (7 days) are nonbusiness days. Alice can deduct the cost of her meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris, but can’t deduct her expenses while in Dublin. She also cannot deduct 7/18 of what it would cost her to travel round-trip between New York and Dublin. Alice pays $750 to fly from New York to Paris, $400 to fly from Paris to Dublin, and $700 to fly from Dublin back to New York. Round-trip air-fare from New York to Dublin would be $1,250. She figures the deductible part of her air travel expenses by subtracting 7/18 of the round-trip fare and other expenses she would have had in traveling directly between New York and Dublin ($1,250 × 7/18 = $486) from her total expenses in traveling from New York to Paris to Dublin and back to New York ($750 + $400 + $700 = $1,850). Her deductible air travel expense is $1,364 ($1,850 − $486).
Non-business days may be treated as business days. If allocation of foreign travel costs is required because of non-business activities, every day the traveler is treated as having spent on business increases the deduction for transportation costs.
There are five instances where a “non-business” day is treated as a “business” day for expense allocation purposes.
- (1) Generally, the departure date and return date are considered business days. So if a traveler leaves the U.S. on a Wednesday night and returns early on a Friday morning, both days count as full business days. There are exceptions for indirect routes or substantial nonbusiness diversions along the way.
- (2) The taxpayer’s presence is required at a particular place for a specific and bona fide business purpose. If an employer requires an employee to be present at a particular date and place for business reasons, the day is a business day even though, because of the scheduled length of the meeting, the employee spends more time on nonbusiness activity (e.g., sightseeing) than on business.
- (3) As long as an individual does business during working hours, other personal activities, like an evening out on the town, won’t turn the business day into a personal day.
- (4) Days when doing business is prevented due to circumstances beyond the individual’s control (for example, bad weather, or a client cancels a business meeting) are business days.
- (5) Weekend days and reasonably necessary standby days between business meetings are treated as business days, no matter what the individual does with his or her time.
HATS illustration: Tina is sent by her employer to Mexico City on business. She is scheduled to participate in business conferences on Wednesday, Friday, and Monday. Thursday, Saturday, and Sunday are business days, not personal days, no matter what she does with her time. But if there had been no business meeting scheduled in Mexico City after Friday, then Saturday and Sunday would count as personal days.