By Bob Rywick
If a taxpayer takes a trip outside of the United States, and the trip is entirely for business purposes, that taxpayer can deduct all of his travel costs, plus meals (at 50 percent), lodging and some other incidental costs, such as the amounts paid for laundry and dry cleaning.
Conversely, if the trip is primarily for personal reasons, such as a vacation or to visit an ill relative, none of the costs of travel to and from the destination are deductible, even if some time is spent on business.
However, lodging costs, 50 percent of the cost of meals, and some incidental expenses would be deductible for the business days. In determining deductibility of foreign travel expenses, expenses incurred in connection with an investment-related activity are deductible to the same extent that they would be deductible if incurred for a business purpose. Thus, any reference to business in this article should be taken to include a reference to an investment-related activity.
The entire time is considered allocable to business or investment-related activity and the full cost of travel is deductible in the following situations:
1. The traveler doesn’t have substantial control over arranging the business trip outside the U.S. An employee who travels outside the U.S. on behalf of his employer under a reimbursement or other expense allowance arrangement is not treated as having substantial control over arranging the trip and therefore isn’t subject to disallowance under the allocation rule, if the employee is:
- Not a managing executive of the employer; and,
- Not related to the employer.
An employee doesn’t have substantial control over arranging the trip merely because she can control the timing.On the other hand, a self-employed person generally has substantial control over arranging his business trips, and thus, unless the self-employed person can establish that getting a vacation wasn’t a major consideration in determining to make the trip, disallowance rules will apply.
2. If the business traveler can prove that the chance for a personal vacation or holiday was not a major consideration in deciding on the trip outside the U.S., no expenses for transportation and meals and lodging while traveling abroad are disallowed under the special allocation rule.
For example, the desire to visit a hospitalized relative while on a foreign business trip is not an opportunity for a personal holiday or vacation. However, if the primary purpose of the foreign trip is to visit an ill relative, for personal reasons, no deduction is allowable.
Foreign travel that is primarily for business
If foreign travel is undertaken primarily, but not entirely, for business purposes, it becomes more difficult to determine whether the travel expenses are deductible.
In such a situation, the costs allocable to the personal part of the trip generally cannot be deducted. So, the meal cost (subject to the 50 percent limitation), lodging, etc. are deductible for the business days. In addition, only part of the travel costs, such as airfare, is deductible. The deductible part equals the percentage that the number of business days are of the total number of days in the trip.
Example 1: Your client flies from New York to London primarily for business purposes. She spends five days in London on business and then takes an eight-day vacation touring England and Wales. The entire trip takes 15 days (one day over, five days of business in London, eight vacation days, and one day coming back).
Seven days qualify as business days (two days traveling between New York and London [see below] and five business days in London) and eight days are personal days. Your client can deduct 7/15 of the transportation and food cost of traveling between New York and London, while 8/15 of the cost is nondeductible. Your client can also deduct under normal travel expense rules the cost of food, lodging, etc., while in London for five days on business. The cost of the eight days vacation is nondeductible.
However, part of the travel costs do not have to be allocated to the personal part of the trip if the primary purpose is business and the trip does not last for more than a week. A week for this purpose means seven consecutive days, not counting the day of departure, but counting the day of return.
Example 2: Your client leaves on a trip outside the U.S. on a Monday and returns the following Monday. The trip is primarily for business purposes. He is treated as away for seven consecutive days starting on the Tuesday following the first Monday and ending on the second Monday. Since he is not away from home for more than seven consecutive days, there is no partial disallowance under the allocation rule.
Even if the trip does last for more than a week, no allocation is required if the personal days total less than 25 percent of the total days spent on the trip. For this purpose, the total days of the trip include both the day of departure and the day of return. In determining whether a day is a business day or a personal day, the following rules apply:
1. Business days are days in which during hours normally considered appropriate for business activity, the traveler’s principal activities are in pursuit of trade or business (or investment-related activity).
2. In addition, business days include each of the following, even though the traveler spent only part of his normal working hours on business activity:
- Days spent traveling to or from the business destination outside the United States by a reasonably direct route. If the traveler uses a roundabout route or interrupts the normal course of travel for personal reasons, he counts as business days only the number of days needed for a reasonably direct trip using the same means of transportation.
- Days required to be spent outside the U.S. at a particular place for a specific and good business reason. Thus, if a traveler is required by his employer to attend a specific business meeting, the whole day of the meeting counts as a business day even though the meeting is so short that the traveler spends most of his normal working hours on non-business activities.
- Days outside the U.S. on which the traveler is unable to carry on business activities due to circumstances beyond his control.
- Weekends, holidays and stand-by days outside the U.S. that fall between business days. However, these count as nonbusiness days if they come at the end of business days.
Example 3: Your client flies from Chicago to Prague, where he spends 17 days on business. He then takes a six-day vacation in the Czech Republic and returns to New York. The entire trip took 25 days (two days New York to Prague and return, 17 business days in Prague, and six days of vacation). Since the six personal days were less than 25 percent of the 25 days (six of 25 equals 24 percent), the full cost of travel to and from Prague is deductible. Only the cost of the six vacation days is not.Caution: While all costs of traveling to and from the foreign destination are deductible if the trip is no longer than a week, even though more than 25 percent of the time is devoted to personal activities, this applies only if the primary purpose of the trip is business and not pleasure.
However, if a large amount of time is spent on personal activities, this may indicate that the primary purpose of the trip is for pleasure, thus causing all the costs of travel to and from the foreign destination to be nondeductible.
Bob Rywick is an executive editor at RIA, in New York, and an estate planning attorney.
