Deductible Foreign Travel
© by Greta P. Hicks, CPA
For income tax purposes, travel outside the United States has it’s
own set of unique rules and recordkeeping requirements. George M. Cohan
told the court that if he went to London to appear in a play, it was reasonable
that he would have to eat and have a place to stay. The court bought his
argument and for years the amount of travel, meals, and entertainment that
a taxpayer could deduct was a reasonable amount. Not so now!
Congress abolished the Cohan Rule and in its place passed Internal
Revenue Code Section 274 which is about 8 pages long and the Regulations
written by the IRS is over 50 pages in length. The best rule for recordkeeping
on travel, meal, and entertainment expenses is that there is never enough
records and when foreign travel is involved more rules go into place. See
Insert for Who, What, When, Where, and Why?
When documenting your business trips outside the United States, your
trip will fall into one of three categories: Travel Entirely for Business,
Travel Primarily for Business, and Travel Primarily for Vacation. The factors
which determine which category your trip falls into are: Number of business
days versus total days away. If your goal is to have all your travel expenses
be deductible, you will need to keep a daily log or diary of business activities
to satisfy the who, what, where, when and why of IRC 274.
The general rules for deductibility of travel outside the US are:
- RULE If your trip is less than one
week, do not count the day you leave the US but count the day you return
to the US.
EXAMPLE You traveled to Paris primarily
for business. You left Denver on Tuesday and flew to New York. On Wednesday,
you flew from New York to Paris, arriving the next morning. On Thursday
and Friday, you had business discussions and from Saturday until Tuesday
, you were sightseeing. You flew back to New York arriving Wednesday afternoon.
On Thursday, you flew back to Denver. Although you were away from your
home in Denver for more than a week, you were not outside the US for more
than a week. This is because the day of departure does not count as a day
outside the US. You can deduct your cost of the round-trip flight between
Denver and Paris. You can also deduct the cost of your stay in Paris for
Thursday and Friday while you conducted business. However, you cannot deduct
the cost of your stay in Paris from Saturday through Tuesday because those
days were spent on nonbusiness activities.
- RULE If your trip is more than one
week, count both the day you leave the US and the day you return to the
US.
EXAMPLE You flew from Seattle to Tokyo,
where you spent 14 days on business and 5 days on personal matters. You
then flew back to Seattle. You spent one day flying in each direction.
Because only 5/21 (less than 25%) of your total time abroad was for nonbusiness
activities, you can deduct as travel expenses what it would have cost you
to make the trip if you had not engaged in any nonbusiness activity. The
amount you can deduct is the cost of the round-trip plane fare and 16 days
of meals (subject to the 50% limit), lodging and other related expenses.
If your trip was not entirely for business, you must allocate travel
expenses on a day-to-day basis between days you conducted business and
days you did not conduct business. If you wish to combine business and
pleasure, here are some hints you may find helpful.
When Do You Start Counting
The Days?
Travel outside the US does not include travel from one point in the
US to another point in the US.
EXAMPLE 1 You fly from New York to Puerto
Rico with a scheduled stop in Miami. You return to New York nonstop. The
flight from New York to Miami is in the US, so only the flight from Miami
to Puerto Rico is outside the US. All of the return trip is outside the
US, as there are no scheduled stops between Puerto Rice and New York.
EXAMPLE 2 You travel by train from New
York to Montreal. The travel from New York to the last scheduled stop in
the US is travel in the US>
EXAMPLE 3 You travel by car from Denver
to Mexico City and return. Your travel from Denver to the border and from
the border back to Denver is travel in the US. The travel outside the US
rules apply from the border to Mexico City and back to the border.
EXAMPLE 4 You fly nonstop from Seattle
to Juneau. Although the flight passes over Canada, the trip is considered
to be travel in the US.
How Many Hours Per Day Do You Need To Work
For The Day To Be A Business Day?
- Count as a business day any day that your presence is required at
a particular place for a specific business purpose, even if you spend most
of the day on nonbusiness activities. OR
- If your principal activity during working hours is in pursuit of
your trade or business, the day is counted as a business day. In an 8 hour
work day, the day needs to be primarily business related. You need to spend
over half the day on business related matters. OR
EXAMPLE You are a doctor practicing
medicine and are a member of a professional association. The association
sponsored a two-week trip to two foreign countries with three professional
seminars in each country. Each seminar was 2 hours long and was held in
a different city. You also made an optional side trip to a well-known tourist
attraction in each of the countries visited. At the end of the trip, you
received a Certificate of Continuing Education in Medicine. The entire
cost of the trip is a nondeductible personal expense. You may, however,
deduct your registration fees and any other expenses incurred that were
directly related to your business.
- Count as a business day any day you are prevented from working because
of circumstances beyond your control, such as illness, accident, or cancellation
by an unrelated party.
- Weekends, holidays, and other necessary standby days are counted
as business days if they fall between business days.
EXAMPLE You travel from New York City
to Quebec where you have a business appointment on Friday. You have another
appointment on the following Monday. Because you had a business activity
of Friday and had another business activity on Monday, the days in between
are counted a business days. This is true even though you use that time
for sightseeing, personal visiting, or other nonbusiness activity.
- If weekends or holidays follow your business meetings or activity
and you remain at your business destination your nonbusiness or personal
reason, they are not business days.
EXAMPLE You travel from New York City
to Quebec for a Friday business meeting, but stayed until Monday before
starting home, Saturday and Sunday would be nonbusiness days.
With a little planning and much record keeping, you can have a fully
deductible business/pleasure trip to destinations outside the US and have
the air fare to and from fully deductible. The meals during business days
are 50% deductible and all other business related expenses on business
and nonbusiness days are fully deductible. Plan your play and keep your
plan.
Travel - Who, What, Where, When, And Why?
To establish the business purpose of your trip, you will need to
keep records to substantiate how much business was conducted.
WHO - The person traveling should keep
a record of business appointments and the name of the business contact
person.
WHAT - Make a brief note of the type
of business conducted, such as: Conference, seminar, or board meeting.
WHEN - What was the date of the business
meeting and the amount of time utilized that day.
WHERE - The city where the business
activity took place.
WHY - Make a note of the business relationship
between yourself and the other party(ies), such as: Customer, Vendor, or
Supplier.
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List of Articles by Greta P. Hicks, CPA
GRETA P. HICKS, CPA and former IRS manager, concentrates in solutions to IRS problems and advises business and tax professional on IRS policies
and procedures. Ms Hicks is owner of TAX SOLUTIONS, Inc., a company providing
educational materials and programs on solutions to IRS problems and is
a nationally known speaker and writer on solutions to IRS problems. To
arrange for consultation contact:
Greta's web site: http://www.gretahicks.com
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