Know What the IRS Considers Business Travel
It’s always nice to be able to combine business with pleasure, but when it comes to combine business with foreign travel and trying to take tax deductions, things can get complicated very quickly. The Internal Revenue Service is very specific about what can and what can’t be deducted, and though the rules are very straightforward in saying that the same things are deductible on a foreign trip as for a domestic one if the purpose is exclusively devoted to business, things get a lot trickier if there is any element of vacation added in.
That is not to say that you can’t combine a foreign business trip with a personal or family vacation – it certainly would seem a waste to go abroad without taking advantage of the proximity to the sights. But it’s essential that you go into your trip with a good understanding of what part of the expenses can be deducted and how the time you’re spending should be allocated or divvied up.
So read the information you’ll find here when you’re making your plans, and if you have any questions either before you go or after you come back, contact our office to discuss the best way to address your expenses.
Invited to a Seminar, Convention or Meeting in a Foreign Country?
If it’s being held outside of North America and you’re thinking that it’s a great way to combine a business expense with travel, you need to know that U.S. tax law only lets you deduct travel expenses for this type of event under the following circumstances:
- You need to show that it is directly related to the active conduct of your trade or business
- You need to to establish that it is “as reasonable” to hold the meeting outside of North America as it is to hold it in North America.
The tax code has a broad definition of what it considers to be the area of North America, so if the convention is outside of the United States, Canada or Mexico but is still in one of several countries in the Caribbean, in an American possession such as the Pacific Island nations or American Samoa, in Bermuda or as far as some Central American countries, it still qualifies as essentially local.
Attending a Convention on a Cruise Ship?
Cruise ship conventions are difficult to deduct, as the rules require not only that the ship be a U.S. flagship, but also that every port of call that is visited is either a U.S. possession or in the United States proper. Add on to that the requirement that the convention must be related to your trade or business and the fact that the most an individual is allowed to deduct is $2,000. If you choose to go, make sure that you get the proper documentation: the IRS requires statements that have been signed by an officer of the convention’s sponsor as well as by the individual taxpayer.
Bringing Your Spouse?
Though the IRS does not generally allow travel expenses for spouses, dependents or employees to be deducted as business expenses, the fact that most lodging charges the same rate for a single as for two occupants can mean that that part of the spouse’s expenses is essentially deductible. The same is true of any vehicle that would be rented or taxi rides – two travel as cheaply as one. Meals and transportation via plane or ship would not be deductible, though there are certain instances where deductions can be taken for these individuals. These include:
- When the individual is the taxpayer’s employee
- When there is a bona fide business reason for the individual to be there, and
- When the individual would otherwise be able to deduct the travel expenses on their own.
Breaking Down the Purpose of the Trip
Primarily Business: The rules for trips abroad that are primarily taken for business purposes are essentially the same as those taken for business travel inside the United States – they are generally deductible in full if they meet any of the conditions listed here:
1. The travel abroad is for seven consecutive days or less. When counting the days, leave out the day that you leave but count the day that you are traveling back home. You will be able to fully deduct all other ordinary and necessary travel expenses.
2. The travel abroad is 75% or more business and less than 25% non-business. You will be able to fully deduct all other ordinary and necessary travel expenses. If, however, 25% or more of the travel includes activities that are not for business, you will need to break down expenses for each day between what was business and what was personal and only deduct the expenses that were for business.
3. You can establish that when you decided to incur the travel expenses it was without the idea of a vacation or holiday being a major consideration. You will be able to fully deduct all other ordinary and necessary travel expenses.
4. You had no “substantial control” over the trip’s arrangements. You will be able to fully deduct all other ordinary and necessary travel expenses.
It is important that you understand what the IRS considers business and what it considers non-business. Days that are spent on non-business activities are non-business days, and so are weekend days, holidays, or other days where no business is done if they occur at the end of the business activities.
Business days are days spent traveling to the destination as long as the route is uninterrupted and reasonably direct. Weekends, holidays or other days where no business is done are also counted as business days if they fall between days when business is being done. Days are also counted as business days if business activities were planned but had to be canceled for unforeseen reasons.
If a trip abroad is being taken for pleasure but a small amount of time is spent on business activities, meeting with foreign colleagues or clients or attending a professional seminar, then none of the travel expenses can be deducted. Other expenses incurred can be deducted on a day-by-day basis, but only if they can be shown to be business expenses.
It is certainly possible to take tax deductions when taking a trip abroad for business purposes, but the rules can be complicated. Please don’t hesitate to call us for any assistance in determining the best way to document and report these expenses.
For help with your business accounting, contact our office at (804) 723-1050 to schedule an appointment.