Make Business Travel a Pleasure – Know the Rules of the Road for What You Can and Can’t Deduct

It sounds too good to be true: a conference for continuing medical education (CME) is being held in the beautiful Bahamas. You decide to make a vacation around it, and even bring your spouse. Then the end of the year rolls around, and you are preparing information for your accountant.

How much of that trip is actually deductible, since the trip had both a personal and business purpose? The answer largely depends on the facts and circumstances; however, deductibility can be maximized with proper planning.

The expenses that may be deductible in the cost of a business trip include airfare or other mode of transportation and related charges, lodging, the expenses for a vehicle such as rental charges and gasoline, and taxi fares. The cost of business-related meals and entertainment must be reduced by one-half. Meals eaten alone can be deducted, subject to the 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} limitation, as long as the trip is overnight or long enough to require you to stop and rest. Tips are allowed as eligible expenses but, as with all expenses, should be reasonable.

The costs of a trip entirely for business purposes are fully deductible as outlined above. When a trip is primarily personal, airfare (or other transportation to your destination) is considered personal, and only the costs related to the business portion of the trip for lodging and meals are deductible. The rules of deductibility for travel expenses differ for domestic versus foreign travel when the trip is mostly for business but includes some personal time.

Travel for a domestic trip undertaken primarily for business is deductible. The determination of whether it was primarily for business is based on facts and circumstances. A reasonable basis to use is time spent, or business days versus total days traveling. In general, determining a business day is ruled by the common-sense test. In other words, would another business person under the same circumstances incur the expense?

Personal entertainment in the evening after a business day does not change the character of the day, and as such, it is counted as business. In addition, if the day would have been business but it was derailed by client cancellation, bad weather, or other matters out of your control, it can still be regarded as business. If business extends over a weekend and it would not be reasonable to expect you to return home, the weekend counts as business. Saturday-night stays booked in order to take advantage of lower fares are also allowed, but the savings should exceed the costs of lodging and meals to stay over, and that should be properly documented. The costs during the trip that are personal in nature, such as lodging, travel, and meals on non-business days, are not deductible.

To give an example: John is a physician attending a CME course in Tampa. The course runs on Thursday, Friday, and Monday. He chooses to extend his trip through Wednesday to visit a friend from college who lives in the area. The entire cost of his round-trip airfare and rental-car charges are deductible, as well as his lodging and half the cost of meals incurred from Thursday through Monday.

Additional provisions are followed for foreign travel when the trip is primarily for business purposes but includes some personal days. There are four tests that must be met in order for the cost of transportation to be fully deductible.

The first test is that the person did not have substantial control over arranging the trip. A self-employed person would not meet this test. The second test is that the travel outside of the U.S. was for one week or less, and that includes the day of return but not the day of departure. Travel to U.S. points during the trip is not counted, but for this test, territories are not included in the definition of the U.S. To meet the third test, less than 25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the time can be spent on personal matters.

Finally, vacation must not be a major consideration in planning the trip, and here a self-employed person can still get the deduction for the travel even if they had control over the planning of the trip. If the trip does not meet one of the four tests, the expense must be allocated on a day-to-day basis to determine the portion eligible for the deduction.

For example: Mary is taking a trip to Germany. She spends one week at a conference and another week sightseeing. Assuming vacation was a factor in her planning of the trip, she may deduct only half the airfare to Germany, as well as the lodging and half the cost of meals, for the week at the conference.

The IRS is particularly strict on cruise-ship conferences, which are becoming increasingly popular. In addition to having a direct relationship to your business, the cruise must meet specific requirements for the costs to be deductible. The ship must be registered in the U.S., all of the ports must be located in the U.S. or its possessions, and you must attach statements to your tax return, signed both by you and an officer of the group sponsoring the convention, including a detailed itinerary outlining the days of the trip and how much time you spent on scheduled business activities. The IRS also limits the deduction for business cruises to a maximum of $2,000 (or $4,000 on a joint return if both spouses attended such conferences).

For cost savings, it is particularly attractive to invite your spouse along on a business trip. The cost of their travel is not deductible unless they are an employee traveling for a business purpose and their expenses would otherwise be deductible. However, the costs you would incur if you were alone are still deductible. This can save money on a vacation because the cost of a hotel may not be greater with double versus single occupancy, and other shared expenses such as a rental car would be fully deductible.

Travel expenses are one of the most common deductions, but they are also highly scrutinized by the Internal Revenue Service due to their potential for abuse. It is important to maintain adequate records to justify the expenses. Receipts are a must, as well as backup to justify the calculation of business allocation if applicable.

For example, charge-card summaries are not acceptable. Detailed hotel receipts are required so that the costs of spa visits or sundries charged to your room can be excluded. It would be good practice to include a conference brochure and a copy of your agenda. If you diverted from your trip, such as returning home via another destination for personal reasons, you should include in your documentation a printout of what the cost of the direct return would be. This should be recorded on the same day as booking, since travel charges change daily.

While self-employed persons can deduct expenses as outlined above, employees can also benefit from these provisions when their employer has an accountable plan for travel reimbursement. In this case, plan must require timely reporting of time, place, and business purpose as well as receipts. The reimbursements for business-related travel to the employee under the plan are tax-free to the employee. Any reimbursement for a personal portion of the travel should be included as compensation to the employee and will be taxed as such. An employer can deduct the business reimbursement as well as any personal payments treated as wages.

Combining some vacation with business travel can provide a nice benefit, particularly when conferences and seminars are held in attractive tourist destinations. Proper planning and documentation ensure that the expenses remain deductible. You should consult your tax advisor with any questions. v

Charlotte Cathro, CPA is a tax manager with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3481; ccathro@mbkcpa.com