Business and Personal Travel Have Some tricky IRS Rules
When a self-employed individual makes a company trip outside of the United States and the trip is 100% for the purpose of your profession, all of the ordinary and necessary company travel expenses are deductible. However, there are rules the IRS has as to what qualifies as ordinary or necessary travel expenses for company and personal travel.
This is the same as if the trip were within the USA. However, when the trip also incorporates a vacation, there are special rules. These rules determine the what part of the travel expenses to and from the destination are deductble; when the other commercial travel expenses, such as lodging, meals, local travel and incidentals. Also, timing is a factor as to the allocation portion of the trip. So, whether you are just visiting one of our neighboring countries or traveling to Europe or even more exotic locales, here are some travel tax pointers:
Is the trip primarily vacation?
When the primary travel is for vacation and only a few hours are spent attending professional seminars or meeting with foreign professional colleagues, none of the expenses for the traveling to and from the general location are deductible. You should allocate travel expenses on a day-by-day basis, and recognize that only the business portion is deductible.
Is your trip primarily business?
When the trip is primarily for business and meets one of the conditions listed below, the expenses you incur for traveling to and from the business destination are deductible in full. This is the same as for travel within the USA. So ask yourself the these questions:
1. Is your business travel 7 days or more?
When travel outside the U.S. the period of one week or less, meaning seven consecutive days, excluding the departure day but including the day of return may be deductible. In addition, all other ordinary and necessary travel expenses are fully deductible.
2. What Percent of Business Travel is Non-Company?
Less than 25% of the total time outside the U.S. can be spent on non-business activities. In addition, when it comes to business and personal travel, all other ordinary and necessary travel expenses are fully deductible for the professional portion of the trip. When you spend 25% or more of the total time on non-business activities, you must account for a day-by-day allocation of all travel expenses. These expenses between personal and trade activities are necessary and only the business portion is deductible.
3. Did you squeeze the business trip into a vacation?
It would seem logical to schedule a business trip while you are on vacation, right? Not according to the IRS. The individual incurring the travel expenses must be able to establish that a personal vacation or holiday was not a major consideration. In addition, all other ordinary and necessary travel expenses are fully deductible.
4. Who was in control of planning the company trip?
The taxpayer did not have “substantial control” over arranging the trip. (For self-employed taxpayers, who would generally have substantial control over the trip arrangements, this provision likely won’t apply.) In addition, all other ordinary and necessary travel expenses are fully deductible.
What does the IRS consider as a business day when traveling?
When determining what constitutes business and non-business time, business days include: days en route to or from the business destination by a reasonably direct route without interruption; days when actual business is transacted; weekends or standby days that fall between business days; and days when business was to have been transacted but was canceled due to unforeseen circumstances.
What is a non-business day when traveling?
Nonbusiness days are days spent on nonbusiness activities as well as weekends, holidays and other standby days that fall at the end of the business activity, if the taxpayer remains at the business destination for personal reasons.
How does the tax law look at foreign conventions, seminars or meetings?
Tax law does not permit a deduction for travel expenses to attend a convention, seminar or similar meeting held outside of the North American area unless the taxpayer is able to prove that:
(1) The meeting directly relates to the active conduct of the taxpayer’s trade or business, and
(2) It is “as reasonable” for the meeting to be held outside of the North American area as it is within the North American area.
How does the IRS define the North American Territories?
The IRS defines “North American area” quite broadly and includes not just the U.S., Canada and Mexico, as you would expect. Also, Bermuda, several countries in the Caribbean basin, U.S. possessions such as American Samoa and other Pacific island nations, and some Central American countries as well.
Cruise Ship Conventions
In order for a taxpayer to deduct the cost of attending a convention that relates to his or her trade or business on a cruise ship, the ship must be a U.S. flagship. Also, all the ports of call must be within the U.S. or its possessions. In addition, the limit for the maximum deduction is $2,000 per attendee. You must prove these requirements through certain signed statements by both the taxpayer and an officer of the convention sponsor. It helps to keep your itinerary of the trip as well, and note what what was business and personal travel.
Spousal Travel Expenses
Generally, the IRS denies deductions for travel expenses for a spouse of the taxpayer on a business trip unless the spouse is an employee of the taxpayer. AND, the second condition is that the travel of the spouse, dependent or employee, is for a bona fide business purpose. AND, the third condition is that the expenses would otherwise be a deductible business travel expense for the spouse. Also, these rules apply to a dependent or employee of the taxpayer.
Spousal Business Travel Rules for Business and Personal Travel During Years 2018-2025
Since the IRS denies a spouse, dependent or other individual who is an employee a deduction for business travel expenses in years 2018 through 2025, the third condition can’t be met. This means that spousal travel expenses won’t be deductible for years 2018 through 2025.
Is there an Exception to the Spousal Travel Deduction?
The law allows a deduction for the single rate for lodging on qualified business trips, and frequently, there is no rate difference between one and two occupants. Meaning you and your wife can lodge for double occupany at the same rate. Thus, virtually the entire lodging expense for an accompanying spouse is deductible. When traveling by car, the law does not require any allocation because the spouse is also traveling in the vehicle. Thus, if traveling by vehicle, the entire cost of the transportation that relates to business is deductible. Also, this generally applies to taxis at the destination.
Do you have questions about Business and Personal Travel Deductions?
As you can see, determining the tax deduction for a foreign business trip of a self-employed individual that is combined with a vacation can be complicated. If you need additional tax guidance or help planning the tax consequences for company and personal travel, you should give this office a call. Alex Franch, BS EA or any of our tax experts are happy to talk through the plan with you. You can reach out to us at 781-849-7200 or contactus@worthtax.com. You may also set up your an appointment today! Oh, and new clients, Worthtax offers numerous client discounts to save you money
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning.
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