May 25, 2017
If you travel a lot on business, you may make some international trips — as well as trips within the United States. When traveling abroad, you may want to add a few extra days to a trip for relaxing and sightseeing.
Keep in mind that the tax rules for foreign business travel are different from those for domestic travel.
Whenever you spend any time vacationing on a foreign business trip, the general rule says you must allocate all your travel expenses — including transportation costs — between business and personal days.
The good news: You might be able to take advantage of two loopholes and deduct all of your foreign transportation expenses despite what the general rule says.
Here’s what you need to know.
Take Advantage of the “One-Week Rule.” As long as your business trip lasts one week or less, you can automatically deduct 100% of transportation costs (including plane fare and cabs to and from airports). This is true even when you actually spend most of your time vacationing. Solely for purposes of figuring out if you qualify for the one-week loophole, don’t count the day you leave. But do count the day you return.
Of course, you can also deduct out-of-pocket daily living expenses (including hotels, cabs, tips and 50% of meals) for all business days while you’re out of the country. You cannot deduct your daily living costs for vacation days.
Fortunately, the definition of a business day is pretty liberal. For example:
- Travel days count.
- Weekends and holidays falling between business days count.
- You can include intervening weekdays between business days.
- You can also count any standby days when your presence is physically required for business reasons — whether or not you are actually called upon to work on those days.
- Finally, you’re allowed to count days you intend to work but can’t for reasons beyond your control (for example, transportation difficulties caused by weather or a terrorist incident).
As you can see, these guidelines are rather taxpayer-friendly. But keep in mind that the main reason for your trip must still be for business. Otherwise, none of your transportation costs are deductible.
Take Advantage of the “25% Rule.” Obviously, some foreign business trips last more than a week. You might be able to take advantage of another loophole — the 25% rule. If you qualify, you can once again deduct 100% of your transportation costs and all your daily out-of-pocket living expenses for business days (subject to the 50% limitation on meals).
The trick here is to make sure you spend less than 25% of your total days vacationing. For this purpose, you can count the day of departure and the day of return as business days. You can also count all the other types of business days listed earlier. In many cases, it’s easy to meet the 25% rule.
Partial write-offs are still allowed when loopholes don’t apply. Some business travelers are able to take advantage of one of the two loopholes by carefully planning foreign business travel. If you are not able to plan a trip that qualifies, you may still get some deductions.
As long as the primary reason for your trip is business, you can always deduct the business percentage of your transportation costs under the general allocation rule for foreign travel. To figure the percentage, simply divide the days spent principally on business by the total number spent outside the country, including travel days. (Travel time counts, along with all the other types of days covered earlier.)
As always, you can write off your out-of-pocket daily living expenses for the business days (subject to the 50% rule for meals).
The general foreign travel allocation rule doesn’t apply to the cost of transportation for legs of trips that begin and end on U.S. soil.
For example, let’s say you are jetting from New York to Tokyo. The main purpose for your trip is two days of business meetings. However, your arrangement doesn’t qualify for either the one-week rule or the 25% rule. You have to change planes in Los Angeles both ways. You can deduct 100% of the cost of the outbound leg from New York to L.A. and 100% of the leg from L.A. back to the Big Apple. The general foreign travel allocation rule applies to the remainder of your airfare (the legs from L.A. to Tokyo and back to L.A.). Once again, the trip must be primarily for business in order for any of your airfare to be deductible.
When you mix vacation with business, it’s critical to carefully document the number of business days and the amount of out-of-pocket expenses allocable to those days. Log all your business activities and the time spent in your daily planner. Make a copy for your tax file. That way, you’ll be protected in the event of an IRS audit.
Consult with your tax advisor if you have any questions about business travel deductions.
© 2017