Tax
breaks are available for travelers who mix a bit of pleasure with their
business travel
Although
video conferencing has made inroads in the ranks of business travelers, there
still are many situations where it's necessary to travel away-from-home
overnight for face-to-face meetings with staff, management, or customers.
Businesspeople or professional who must travel for work reasons should keep in
mind that they may be able to qualify for a travel bargain by piggybacking a
vacation onto an out-of-town business trip. In effect, the business traveler
gets free vacation airfare if the trip is set up the right way. And if the
travel is undertaken for an employer, a properly set up reimbursement
arrangement for the business portion of the trip will be income- and
payroll-tax-free. This Practice Alert takes a closer look at how this
combination works for domestic travel, along with a review of other business
travel strategies that may yield personal savings. It 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.
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. ( Reg. § 1.162-2(b)(1)
) The cost of lodging plus 50% of meals while on business status is deductible.
Additionally, if the traveler is an employee reimbursed for all 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 (but the personal portion of the trip yields no tax benefit to the
traveler).
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.
Example
1: Jane, a self-employed information technology specialist, flies from the East
Coast to Los Angeles for a 5-day business trip. She takes in three days of
vacation and sight-seeing after the business part of the trip is over.
Result:
Because Jane can deduct the entire air fare, part of her mini-vacation is, in
effect, subsidized by the tax break.
Example
2: The facts are the same as in
illustration (1), except that Jane is employed by a corporation that reimburses
her for the business portion of the trip after she submits detailed records and
receipts. She pays for the personal portion of the trip (meals and lodging during
the three personal days).
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
Jane, and is not subject to FICA or income tax withholding. ( Reg. §
1.62-2(c)(2)(i) , Reg. § 1.62-2(d)(1) ) That's true even though she took a
mini-vacation after her business trip ended. The corporation deducts the travel
costs it pays (but only 50% of the cost of meals is deductible).
Example
3: The facts are the same as in illustration (2), except that the corporation
reimburses Jane for the cost of the entire trip, including the 3-day
mini-vacation.
Result:
Her cost for the personal portion of the trip consists of the tax she 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 Jane is on business travel status, 100% of the round-trip air fare,
100% of the lodging costs while she is on travel status, and (assuming that her
entire compensation package is “reasonable”) 100% of the cost of the
mini-vacation since that was treated as compensation paid to Jane.
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 regs do say,
however, that the way travelers split their time between business and personal
pursuits is “an important factor.” ( Reg. § 1.162-2(b)(2) )
Example 4: Fred works in Atlanta and travels
to New Orleans on business. On his way home, he stops in Mobile to visit his
parents. During the nine days he is away from home, he spends $1,999 for
travel, meals, lodging, and other travel expenses. Had he not stopped in
Mobile, Fred would have been away from home for only six days and his trip
would have cost only $1,699.
Result:
Fred can deduct $1,699 for his trip, including the round-trip transportation to
and from New Orleans. The 50% deduction limit applies to his meals while on business
status. (IRS Pub. 463 (2010), p. 6)
As is evident from example (4), the personal
part of a trip need not occur at the business destination. It can take place on
the way home from the business destination (or, for that matter, en route to
the business destination).
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. The employee doesn't pay tax on the reimbursement for his
Saturday meal and lodging expenses. ( PLR 9237014 ) In this case, IRS said that
under a “common sense test,” payments to the employee for the Saturday stay
were deductible if a “hardheaded business person would have incurred such
expenses under like circumstances.”
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) or excludible if the traveler is reimbursed under an accountable
plan. Note that in the context of foreign travel, IRS Pub. 463 (2010), p. 8,
treats 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 air fare) is limited to
what the traveler would have spent on meals during the weekend at the
out-of-town location. (IRS Pub. 463 (2010), p. 4)
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. ( Code Sec. 274(m)(3) ) 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. ( Rev Rul
56-168, 1956-1 CB 93 ) This rule can be a money saver on accommodations. For
example, where the cost of a hotel room is $200 for one occupant and $149 for
two, a taxpayer on business status may deduct $149 per night, not $100, when he
gets a room for two. (IRS Pub. 463 (2010), p. 5)
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. (Pohl, Kenneth,
(1990) TC Memo 1990-298 , PH TCM ¶90298 , IRS Pub. 463 (2010), p. 5)
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