Travel expenses include transportation, lodging, meals, and related incidentals. Business travel expenses are fully deductible (except for meal expenses, which are 50% deductible). The travel expenses must be properly substantiated.
There are different rules for domestic and foreign travel. There are also different rules depending on whether the travel is exclusively for business, primarily for business, or primarily for personal reasons.
Domestic Travel
Exclusively for Business: If a taxpayer’s trip is solely for business reasons, all reasonable and necessary travel expenses (travel fares, lodging, transportation, meals, and incidentals) are fully deductible (except that meals are 50% deductible).
Primarily for Business: the deductible travel expenses include the costs of getting to and from the business destination and any business related expenses while at the business destination. Personal expenses incurred while at the destination are not deductible.
Primarily for Personal Reasons: the costs of getting to and from the destination are not deductible because they are considered personal expenses. However, any business costs the taxpayer pays at the destination will be deductible.
Whether the trip is primarily for business or personal reasons depends on the facts and circumstances of the travel. The IRS tends to focus on the amount of time spent on business and personal activities. The primary purpose of the trip is determined based on which purpose (business or personal) exceeds 50% of the time spent on the trip.
Example 1: Joan has a business in Detroit. She travels to L.A. for meetings that span four days. Joan arrives in L.A., spends four days in meetings, and immediately returns home to Detroit. She spent $500 in airfare, $800 in lodging, and $500 in food. Since, Joan’s trip is exclusively for business, Joan can claim travel expenses of $1,550 ($500 airfare, $800 lodging, and 50% of $500 food).
Example 2: Same facts as above except Joan spends three days site seeing throughout California. She spends $600 in lodging, $250 in meals, and $150 in auto expenses while site seeing. Since the primary purpose of her trip was business (based on 4 days of business versus 3 days personal), she may still deduct the $1,550 travel expenses from Example 1. However, the expenses for lodging ($600), meals ($250), and auto expenses ($150) she spent while site seeing are nondeductible personal expenses.
Example: Same facts as example 2 except Joan spends 6 days site seeing. Since the purpose of her trip is now considered personal (based on 4 days of business versus 6 days personal), the costs of getting to and from the destination are nondeductible. Thus, the $500 airfare to L.A. is no longer deductible. Her site seeing expenses are also not deductible. However, Joan may still deduct her business expenses while in L.A. ($800 in lodging and 50% of her $500 food expenses from example 1).
Foreign Travel
Exclusively for Business: If a taxpayer’s trip is solely for business reasons, all reasonable and necessary travel expenses (travel fares, lodging, transportation, meals, and incidentals) are fully deductible (except that meals are 50% deductible).
Majority of Time on Business: ALL travel expenses are allocated between deductible business expenses and nondeductible personal expenses. The expenses should be allocated to deductible and nondeductible categories using a day-to-day allocation method based on business days and personal days. There are two things to take note of:
- This differs from the domestic travel rules where the costs of getting to and from and destination are fully deductible if the trip is primarily for business. For foreign travel, the costs of getting to and from the destination must be allocated if the trip is not exclusively for business, even though the majority of time is spent on business
- ALL travel expenses (not just getting to and from the destination) must be allocated
Majority of Time for Personal Reasons: ALL travel expenses (costs of getting to and from the destination, lodging, meals, etc.) are not deductible because they are considered personal expenses. However, any expenses that the taxpayer pays at the destination will be deductible if they are directly related to business.
While the foreign travel rules require an allocation of expenses if business travel is combined with personal travel, there is a safe harbor. If the primary purpose of the trip was business AND any of the following exceptions is met, allocation of travel expenses is not required–the trip is treated as being exclusively for business (and 100% of the travel costs are deductible):
- No more than seven consecutive days are spent outside the U.S.
- Less than 25% of the total time on the trip is devoted to nonbusiness activities
- The taxpayer has no substantial control over arranging the trip—a self employed taxpayer is generally considered to have substantial control over his travel and won’t qualify under this exception. Employees may qualify under this exception.
- The taxpayer establishes through a facts and circumstances analysis that personal vacation was not a major consideration.
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230