Tax Tips to Identify Tax-Deductible Travel Days
The following article was originally posted in the July 2012 edition of the Bradford Tax Institute Newsletter. We do not claim to be the author nor the owner of this article or its contents.
Tax Tips to Identify Tax-Deductible Travel Days
If you want tax deductions for all or part of your business trip, you need to know the tax rules that make your days either business or personal.
In this article, we use the foreign-travel rules to classify business and personal days because the foreign rules are both clear and logical. Further, by using this one set of rules to classify the days of your trip, you avoid confusion and know that your days of travel, both foreign and domestic, are properly classified as business or personal.
Why bother? When you know the rules, you are likely to deduct a larger part of your combined business and personal trips, which means more money in your pocket because you are paying less in taxes.
The rules in this article apply to travel. So the natural first question is: When does tax law consider you as being in travel status?
Answer. You are in travel status when you are away from home in pursuit of business. The IRS applies the “overnight rule” to see if you pass the “away from home” test. Under the overnight rule, you are in business travel status when because of business you sleep away from home overnight or otherwise require sleep or rest.
Example. Say you live and work in Washington, D.C. You register for a business seminar in New York. Depending on how you make the trip to attend the seminar, you may or may not be in travel status.
Travel status. You fly to New York the afternoon before the seminar and stay overnight. The overnight stay puts you in business travel status. Your proper deductions include airfare, ground transportation, and meals and lodging for the time you are gone.
Non-travel status. You fly to New York in the morning, attend the all-day seminar, and return that evening. You are not in travel status because you did not sleep overnight. Thus, your proper deductions are airfare and ground transportation only. Your meals are not deductible as travel expenses as you never achieved travel status.
Tax Deductions for Business Days
When you have a business travel day, tax law limits your business meal deductions for breakfast, lunch, dinner, drinks, and snacks to 50 percent of the amounts you spend, but allows 100 percent of your other travel expenses (local transportation, tips to the bellman and maids, lodging, Internet, and other expenses of sustaining life on the road).
Business-Day Overview Flowchart
The IRS gives you two basic types of tax-deductible business workdays:
Primarily business. You count as a business travel day any day when during normal business hours your principal activity is the pursuit of business. In tax law, primary or principal means more than 50 percent; therefore, you must work more than four hours because in the U.S., eight hours is considered a normal business workday. (Note: you likely know of businesses that work less than this, but stay with “more than four hours” to be safe and fit within the government’s definition.)
Presence required. If you had to stay overnight because your business required your presence at a particular place for a specific and bona fide business purpose, you have a deductible business travel day.
You count as business travel days those days you spend transporting yourself in a reasonable direct route to your overnight business destination.
Example. You drive from your home in Washington, D.C., to a convention in San Francisco, but take a side trip to the Grand Canyon. You identify mileage, lodging, meals, and time spent on both the personal and business parts of the trip. You deduct the business part only.
Mode of transportation. For your transportation, you can use an airplane, car, van, truck, train, boat, motor home, or other reasonable means of transportation.
Weekends, Holidays, and Standby Days
Weekends, holidays, and other necessary standby days sandwiched by business days count as business days during a trip you conduct with reasonable dispatch.
The weekend, holiday, and standby-day rule applies to foreign destinations. For destinations in the U.S., consider the days as business days when it would not be practical to return home from your business destination for the weekend because of time required or expense involved.
When you are in the weekend, holiday, or standby situation, the IRS states that the days are business days even when you do no business on such days.
Example. You live in Washington, D.C., and transport yourself to San Francisco for meetings on Friday and Monday. Obviously, you need to spend the weekend as it is neither practical (e.g., time-wise) nor cost-effective to return home on Saturday and then fly back on Sunday. Since you have to stay anyway, you spend the weekend sightseeing. Here, you treat your Saturday and Sunday sightseeing days as business travel days even though you
do no work at all.
On the other hand, let’s say you are only 107 miles from home and you have meetings on Friday and Monday. Both the cost and the short time involved make it likely that the IRS and the courts would consider the weekend personal if you decide to stay.
You count as a business travel day any day when circumstances beyond your control prevent you from actively pursuing your business objective.
Example. You travel to Chicago to meet with a colleague who is going to help you improve your business. On the way to your meeting, your colleague becomes involved in a car accident and is not available for your meeting that day. You play golf and wait until the next day to meet with your business-improving colleague. You treat the day of your colleague’s accident, your golf day, as a business day. (To deduct the cost of playing golf, you need to meet the business entertainment rules.)
Saved Money on Travel Day
You might achieve a sizeable discount on your business travel if you travel a day or two earlier or later. If the savings you achieve exceed the cost of spending the extra day or two, then those costs are business-day travel costs.
Example. You need to travel to Hawaii from New York. When you check the airfares, you find that you can save $1,100 if you travel on Tuesday rather than on Wednesday. Your cost of staying in Hawaii this extra day is $350. The savings of $750 on the airfare will make your extra day in Hawaii a deductible business travel day.
Travel Before the First Day of Business
Say your business meeting is on a Monday, but you travel on Friday to the destination for a personal boondoggle. You treat Friday night, Saturday, and part of Sunday as personal. Your business-travel-day deductions begin on Sunday.
Travel After the Last Day of Business
Say that the business reasons for your travel end on Thursday, but that you stay until Sunday before returning home. You must treat Friday and Saturday as personal days.
Spend a few minutes planning your combined business and personal travel so that you benefit from the rules. The best place to start is to think of what happens each day. The flowchart in this article makes it easy to look at each day.
Now that you have the days analyzed, organize the trip so that it gives you the most business days.
Always take a look at weekends, holidays, and standby days for business-day possibilities.
The travel rules offer one of the many tax advantages that you earn because you own and operate a business.