Many of you may travel to foreign countries for both business and personal reasons. Consequently, it is important to be aware of the rules governing what can be deducted with respect to foreign business travel.
When traveling outside the United States for business, what can be deducted depends on how much of the trip is dedicated to business and how much is personal travel.
For instance, if the trip is entirely for business purposes, you can deduct all the travel costs, plus meals (at 50 percent), lodging, and some incidental costs such as laundry and dry cleaning.
If the trip is primarily personal, however, none of the costs of travel to and from the destination are deductible, even if some time is spent on business. Lodging, meals, etc. would be deductible, though, for those business days.
The rules are more complex if the trip is primarily but not entirely for business.
In this case, unless an exception applies (as discussed below), the costs allocable to the personal, or vacation, part of the trip cannot be deducted. For example, if the trip covers 10 days — four personal and six business days — meals, lodging, etc. are only deductible for the business days. Furthermore, only 60 percent of the travel costs (airfare, for instance) are deductible, reflecting the fact that only 60 percent of the days of the trip were business days.
However, if the primary purpose of the trip is business and the trip does not last more than a week (seven consecutive days, not counting the day of departure, but counting the day of return), accounting for a portion of the travel costs as nondeductible is not necessary.
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 includes both the day of departure and the day of return. Even if business is conducted on only part of a day, it’s counted as a business day. Business days also include days spent traveling to or from a business destination and weekend days or holidays falling between two business days.
Consider this example: Frank flies to Paris on a Monday primarily for business reasons. He spends Tuesday and Wednesday vacationing and then spends Thursday, Friday, and the following Monday through Thursday on business before flying home Friday. Counting the days of return and departure, it’s a 12-day trip. Only the first Tuesday and Wednesday are nonbusiness days. Thus, less than 25 percent of the trip is personal (2 of 12 days). Except for meals and lodging costs for those two vacation days, the rest of the meals (at 50 percent) and lodging, and all of the travel costs (airfare, etc.) are deductible. The travel costs need not be allocated between personal and business because of the 25 percent rule.
If you don’t meet the one-week or 25 percent test, you may still be able to deduct all of the travel costs if you can show that the chance to take a vacation was not a major consideration for the trip. Of course, the larger the vacation portion, the more difficult it will be to make your case.
If you travel by ocean liner, cruise ship, or other form of luxury water transportation, the rules are very restrictive. Please contact our office for details.
As you can tell from the above discussion, the tax implications of foreign travel can be quite complex, depending on the nature of the trip. If you have questions about whether your planned foreign travel will be deductible for income tax purposes, please call our office.