FileLater Online Income Tax Extensions

Authors Row  

Deductible Foreign Travel

© by Greta P. Hicks, CPA

For income tax purposes, travel outside the United States has itís 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?

  1. 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

  2. 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
  3. 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.

  4. 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.

  5. Weekends, holidays, and other necessary standby days are counted as business days if they fall between business days.
  6. 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.

  7. 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.
  8. 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.

Previous Article | Next Article

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

SEARCH:

You can search for information in the entire Authors Row section, or in the entire site. For a more focused search, put your search word(s) in quotes.





Greta P. Hicks, CPA Main | Authors Row Main | Home