Understanding business travel deductions can be a daunting task. However, it is important for investors and business owners who travel as part of their business activities to gain a working knowledge of these regulations in order to take full advantage of the opportunities available to them.
“It’s well within [the average taxpayer’s] grasp…to understand just those particular rules that apply to them, so that they can properly document their deductions and so they can structure their activities so they fall within a proper deduction,” Fred Thompson, founder and principal of Frederick A. Thompson, CPA Inc., said. “I’ve seen a lot of people that miss deductions just because they don’t know the rules.”
First, investors must determine whether their travel expenses are eligible for deduction at all.
When traveling within the United States, all expenses can be deducted if the trip is purely for business. If business and pleasure are combined, only the business costs can be deducted.
If a person traveled from New York to Florida for a business conference, at a total cost of $900 for travel, lodging, etc., and afterwards stopped in North Carolina to visit friends for two days before heading home, bringing the total travel costs to $1,200, that person could deduct the $900 costs from going to Florida and back, but not the expenses from the side trip. It is also important to note that typically only 50 percent of meals and entertainment can be deducted, even on a trip that is purely for business.
One or two business-related events do not a business trip make. “The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip,” according to IRS Publication 463.
The rules for foreign travel get a bit more complicated. “The IRS in general is skeptical of travel [and] entertainment, because they assume there’s a personal element to it,” Thompson said. “And that’s more so when it comes to foreign travel.”
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“If the [foreign] trip is less than a week and it’s a business trip, you can deduct 100 percent of the transportation, and the lodging and so forth,” Thompson said. “If the trip is more than a week or non-business is a substantial part of the trip, then you get into a situation where you have to actually figure out the business days, the total days, and you can then…[deduct] a percentage of the travel.”
But here’s a red flag for traveling investors: “If you travel outside of the United States primarily for vacation or for investment purposes, the entire cost of the trip is a nondeductible personal expense,” according to IRS Publication 463 (emphasis added).
Travel for the purposes of scouting out new investment property may not be deductible; however, “ordinary and necessary” expenses related to already-owned rental or royalty property are, even if the property is not producing income, according to Thompson. Travel expenses related to the management of income-producing property are also deductible, Thompson said, although the deductions are itemized with a 2 percent floor. Investors would be wise to check with an accountant before planning investment-related travel.
For both domestic and foreign travel, weekends, holidays and other “standby” days are considered as business days if they fall between legitimate business days on a trip.
“Let’s say…[a business traveler has] a business meeting on Thursday and Friday, and they have to stay the weekend. And then they have business on Monday or Tuesday. If they can’t return home on the weekend, those two weekend days are counted as business days, even if they don’t do any business,” Thompson said. “So if somebody can control their activities or what they do, they can structure things so they can basically kind of go have fun on Uncle Sam’s dime.”
In order to get the full benefits of business travel deductions, it is important for travelers to keep a record of all their business-related expenses so that they know exact amounts and have proof of the nature of these expenses.
Approximate or estimated amounts cannot be deducted. The IRS recommends that travelers keep a log or other written record of expenses in addition to keeping receipts, cancelled checks or bills to document travel expenses, according to IRS Publication 463.
“If the IRS comes along and you’ve documented those things, the auditors are very hard-pressed to come about with a different interpretation, unless…you’ve falsified some records or something,” Thompson said.
Thompson also said that he believes it’s important for taxpayers to be informed consumers of the tax system if they want to save on taxes that can be avoided.
“One of the main things about tax I think, in general, is it’s always changing. It’s like trying to hit a moving target made out of Jell-O,” Thompson said. “[But] you have to be assertive and know that you can manage your taxes, whatever your tax situation is. There are all sorts of…different ways of structuring things.”
Since business travel deductions can be very complicated and tax laws are often changing, investors should do further research with the IRS or consult an accountant before making travel plans. This is the best way for investors to ensure that they are fully informed before taking any major steps.
Unless otherwise specified, all travel deduction information was drawn from IRS Publication 463.