| Pub. 463 (2005), Travel, Entertainment, Gift, and Car Expenses |
2005 Tax Year |
1.
Travel
If you temporarily travel away from your tax home, you can use this chapter to determine if you have deductible travel expenses.
This chapter discusses:
-
Traveling away from home,
-
Temporary assignment or job, and
-
What travel expenses are deductible.
It also discusses the standard meal allowance, rules for travel inside and outside the United States, luxury water travel,
and deductible
convention expenses.
Travel expenses defined.
For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for your business,
profession, or job.
An ordinary expense is one that is common and accepted in your field of trade, business, or profession. A necessary
expense is one that is helpful
and appropriate for your business. An expense does not have to be required to be considered necessary.
You will find examples of deductible travel expenses in Table 1-1, later.
You are traveling away from home if:
-
Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary
day's work,
and
-
You need to sleep or rest to meet the demands of your work while away from home.
This rest requirement is not satisfied by merely napping in your car. You do not have to be away from your tax home for a
whole day or from
dusk to dawn as long as your relief from duty is long enough to get necessary sleep or rest.
Example 1.
You are a railroad conductor. You leave your home terminal on a regularly scheduled round-trip run between two cities and
return home 16 hours
later. During the run, you have 6 hours off at your turnaround point where you eat two meals and rent a hotel room to get
necessary sleep before
starting the return trip. You are considered to be away from home.
Example 2.
You are a truck driver. You leave your terminal and return to it later the same day. You get an hour off at your turnaround
point to eat. Because
you are not off to get necessary sleep and the brief time off is not an adequate rest period, you are not traveling away from
home.
Members of the Armed Forces.
If you are a member of the U.S. Armed Forces on a permanent duty assignment overseas, you are not traveling away from
home. You cannot deduct your
expenses for meals and lodging. You cannot deduct these expenses even if you have to maintain a home in the United States
for your family members who
are not allowed to accompany you overseas. If you are transferred from one permanent duty station to another, you may have
deductible moving expenses,
which are explained in Publication 521, Moving Expenses.
A naval officer assigned to permanent duty aboard a ship that has regular eating and living facilities has a tax home
aboard ship for travel
expense purposes.
If you (and your family) do not live at your tax home (defined later), you cannot deduct the cost of traveling between your
tax home and your
family home. You also cannot deduct the cost of meals and lodging while at your tax home. See Example 1 that follows.
If you are working temporarily in the same city where you and your family live, you may be considered as traveling away from
home. See Example
2, below.
Example 1.
You are a truck driver and you and your family live in Tucson. You are employed by a trucking firm that has its terminal in
Phoenix. At the end of
your long runs, you return to your home terminal in Phoenix and spend one night there before returning home. You cannot deduct
any expenses you have
for meals and lodging in Phoenix or the cost of traveling from Phoenix to Tucson. This is because Phoenix is your tax home.
Example 2.
Your family home is in Pittsburgh, where you work 12 weeks a year. The rest of the year you work for the same employer in
Baltimore. In Baltimore,
you eat in restaurants and sleep in a rooming house. Your salary is the same whether you are in Pittsburgh or Baltimore.
Because you spend most of your working time and earn most of your salary in Baltimore, that city is your tax home. You cannot
deduct any expenses
you have for meals and lodging there. However, when you return to work in Pittsburgh, you are away from your tax home even
though you stay at your
family home. You can deduct the cost of your roundtrip between Baltimore and Pittsburgh. You can also deduct your part of
your family's living
expenses for meals and lodging while you are living and working in Pittsburgh.
To determine whether you are traveling away from home, you must first determine the location of your tax home.
Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home.
It includes the
entire city or general area in which your business or work is located.
If you have more than one regular place of business, your tax home is your main place of business. See Main place of business or work,
later.
If you do not have a regular or a main place of business because of the nature of your work, then your tax home may be the
place where you
regularly live. See No main place of business or work, later.
If you do not have a regular place of business or post of duty and there is no place where you regularly live, you are
considered an itinerant (a transient) and your tax home is wherever you work. As an itinerant, you cannot claim a travel expense
deduction because you
are never considered to be traveling away from home.
Main place of business or work.
If you have more than one place of work, consider the following when determining which one is your main place of business
or work.
-
The total time you ordinarily spend in each place.
-
The level of your business activity in each place.
-
Whether your income from each place is significant or insignificant.
Example.
You live in Cincinnati where you have a seasonal job for 8 months each year and earn $40,000. You work the other 4 months
in Miami, also at a
seasonal job, and earn $15,000. Cincinnati is your main place of work because you spend most of your time there and earn most
of your income there.
No main place of business or work.
You may have a tax home even if you do not have a regular or main place of work. Your tax home may be the home where
you regularly live.
Factors used to determine tax home.
If you do not have a regular or main place of business or work, use the following three factors to determine where
your tax home is.
-
You perform part of your business in the area of your main home and use that home for lodging while doing business in the
area.
-
You have living expenses at your main home that you duplicate because your business requires you to be away from that home.
-
You have not abandoned the area in which both your historical place of lodging and your claimed main home are located; you
have a member or
members of your family living at your main home; or you often use that home for lodging.
If you satisfy all three factors, your tax home is the home where you regularly live. If you satisfy only two factors,
you may have a tax home
depending on all the facts and circumstances. If you satisfy only one factor, you are an itinerant; your tax home is wherever
you work and you cannot
deduct travel expenses.
Example 1.
You are single and live in Boston in an apartment you rent. You have worked for your employer in Boston for a number of years.
Your employer
enrolls you in a 12-month executive training program. You do not expect to return to work in Boston after you complete your
training.
During your training, you do not do any work in Boston. Instead, you receive classroom and on-the-job training throughout
the United States. You
keep your apartment in Boston and return to it frequently. You use your apartment to conduct your personal business. You also
keep up your community
contacts in Boston. When you complete your training, you are transferred to Los Angeles.
You do not satisfy factor (1) because you did not work in Boston. You satisfy factor (2) because you had duplicate living
expenses. You also
satisfy factor (3) because you did not abandon your apartment in Boston as your main home, you kept your community contacts,
and you frequently
returned to live in your apartment. You have a tax home in Boston.
Example 2.
You are an outside salesperson with a sales territory covering several states. Your employer's main office is in Newark, but
you do not conduct any
business there. Your work assignments are temporary, and you have no way of knowing where your future assignments will be
located. You have a room in
your married sister's house in Dayton. You stay there for one or two weekends a year, but you do no work in the area. You
do not pay your sister for
the use of the room.
You do not satisfy any of the three factors listed earlier. You are an itinerant and have no tax home.
Temporary Assignment or Job
You may regularly work at your tax home and also work at another location. It may not be practical to return to your tax home
from this other
location at the end of each work day.
Temporary assignment vs. indefinite assignment.
If your assignment or job away from your main place of work is temporary, your tax home does not change. You are considered
to be away from home
for the whole period you are away from your main place of work. You can deduct your travel expenses if they otherwise qualify
for deduction.
Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last)
for one year or less.
However, if your assignment or job is indefinite, the location of the assignment or job becomes your
new tax home and you cannot deduct your travel expenses while there. An assignment or job in a single location is considered
indefinite if it is
realistically expected to last for more than one year, whether or not it actually lasts for more than one year.
If your assignment is indefinite, you must include in your income any amounts you receive from your employer for living
expenses, even if they are
called travel allowances and you account to your employer for them. You may be able to deduct the cost of relocating to your
new tax home as a moving
expense. See Publication 521 for more information.
Exception for federal crime investigations or prosecutions.
If you are a federal employee participating in a federal crime investigation or prosecution, you are not subject to
the one-year rule. This means
you may be able to deduct travel expenses even if you are away from your tax home for more than one year.
For you to qualify, the Attorney General must certify that you are traveling:
-
For the federal government,
-
In a temporary duty status, and
-
To investigate or prosecute, or provide support services for the investigation or prosecution of, a federal crime.
You can deduct your otherwise allowable travel expenses throughout the period of certification.
Determining temporary or indefinite.
You must determine whether your assignment is temporary or indefinite when you start work. If you expect an assignment
or job to last for one year
or less, it is temporary unless there are facts and circumstances that indicate otherwise. An assignment or job that is initially
temporary may become
indefinite due to changed circumstances. A series of assignments to the same location, all for short periods but that together
cover a long period,
may be considered an indefinite assignment.
The following examples illustrate whether an assignment or job is temporary or indefinite.
Example 1.
You are a construction worker. You live and regularly work in Los Angeles. You are a member of a trade union in Los Angeles
that helps you get work
in the Los Angeles area. Because of a shortage of work, you took a job on a construction project in Fresno. Your job was scheduled
to end in 8 months.
The job actually lasted 10 months.
You realistically expected the job in Fresno to last 8 months. The job actually did last less than 1 year. The job is temporary
and your tax home
is still in Los Angeles.
Example 2.
The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 18 months. The job actually
was completed in 10 months.
Your job in Fresno is indefinite because you realistically expected the work to last longer than 1 year, even though it actually
lasted less than 1
year. You cannot deduct any travel expenses you had in Fresno because Fresno became your tax home.
Example 3.
The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 9 months. After 8 months,
however, you were asked to remain for 7 more months (for a total actual stay of 15 months).
Initially, you realistically expected the job in Fresno to last for only 9 months. However, due to changed circumstances occurring
after 8 months,
it was no longer realistic for you to expect that the job in Fresno would last for one year or less. You can only deduct your
travel expenses for the
first 8 months. You cannot deduct any travel expenses you had after that time because Fresno became your tax home when the
job became indefinite.
Going home on days off.
If you go back to your tax home from a temporary assignment on your days off, you are not considered away from home
while you are in your hometown.
You cannot deduct the cost of your meals and lodging there. However, you can deduct your travel expenses, including meals
and lodging, while traveling
between your temporary place of work and your tax home. You can claim these expenses up to the amount it would have cost you
to stay at your temporary
place of work.
If you keep your hotel room during your visit home, you can deduct the cost of your hotel room. In addition, you can
deduct your expenses of
returning home up to the amount you would have spent for meals had you stayed at your temporary place of work.
Probationary work period.
If you take a job that requires you to move, with the understanding that you will keep the job if your work is satisfactory
during a probationary
period, the job is indefinite. You cannot deduct any of your expenses for meals and lodging during the probationary period.
What Travel Expenses Are Deductible?
Once you have determined that you are traveling away from your tax home, you can determine what travel expenses are deductible.
You can deduct ordinary and necessary expenses you have when you travel away from home on business. The type of expense you
can deduct depends on
the facts and your circumstances.
Table 1-1 summarizes travel expenses you may be able to deduct. You may have other deductible travel expenses that are not
covered there, depending
on the facts and your circumstances.
When you travel away from home on business, you should keep records of all the expenses you have and any advances you receive
from your employer.
You can use a log, diary, notebook, or any other written record to keep track of your expenses. The types of expenses you
need to record, along with
supporting documentation, are described in Table 5-1 (see chapter 5).
Separating costs.
If you have one expense that includes the costs of meals, entertainment, and other services (such as lodging or transportation),
you must allocate
that expense between the cost of meals and entertainment and the cost of other services. You must have a reasonable basis
for making this allocation.
For example, you must allocate your expenses if a hotel includes one or more meals in its room charge.
Travel expenses for another individual.
If a spouse, dependent, or other individual goes with you (or your employee) on a business trip or to a
business convention, you generally cannot deduct his or her travel expenses.
Employee.
You can deduct the travel expenses of someone who goes with you if that person:
-
Is your employee,
-
Has a bona fide business purpose for the travel, and
-
Would otherwise be allowed to deduct the travel expenses.
Business associate.
If a business associate travels with you and meets the conditions in (2) and (3) above, you can deduct the travel
expenses you have for that
person. A business associate is someone with whom you could reasonably expect to actively conduct business. A business associate
can be a current or
prospective (likely to become) customer, client, supplier, employee, agent, partner, or professional advisor.
Bona fide business purpose.
A bona fide business purpose exists if you can prove a real business purpose for the individual's presence. Incidental
services, such as typing
notes or assisting in entertaining customers, are not enough to make the expenses deductible.
Table 1-1. Travel Expenses You Can Deduct
| |
This chart summarizes expenses you can deduct when you travel away from home for business
purposes.
|
| IF you have expenses for... |
THEN you can deduct the cost of... |
|
transportation
|
travel by airplane, train, bus, or car between your home and your business destination. If you were provided with a
ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. If you travel by ship,
see Luxury Water
Travel and Cruise Ships (under Conventions) for additional rules and limits.
|
|
taxi, commuter bus, and airport limousine
|
fares for these and other types of transportation that take you between:
1)The airport or station and your hotel, and
2)The hotel and the work location of your customers or clients, your
business meeting place, or your temporary work location.
|
|
baggage and shipping
|
sending baggage and sample or display material between your regular and temporary work locations.
|
|
car
|
operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the
standard mileage rate, as well as business-related tolls and parking. If you rent a car while away from home on business,
you can deduct only the
business-use portion of the expenses.
|
|
lodging and meals
|
your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to
properly perform your duties. Meals include amounts spent for food, beverages, taxes, and related tips. See Meals for additional rules and
limits.
|
|
cleaning
|
dry cleaning and laundry.
|
|
telephone
|
business calls while on your business trip. This includes business communication by fax machine or other
communication devices.
|
|
tips
|
tips you pay for any expenses in this chart.
|
|
other
|
other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation
to or
from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer.
|
Example.
Jerry drives to Chicago on business and takes his wife, Linda, with him. Linda is not Jerry's employee. Linda occasionally
types notes, performs
similar services, and accompanies Jerry to luncheons and dinners. The performance of these services does not establish that
her presence on the trip
is necessary to the conduct of Jerry's business. Her expenses are not deductible.
Jerry pays $199 a day for a double room. A single room costs $149 a day. He can deduct the total cost of driving his car to
and from Chicago, but
only $149 a day for his hotel room. If he uses public transportation, he can deduct only his fare.
You can deduct the cost of meals in either of the following situations.
Business-related entertainment is discussed in chapter 2. The following discussion deals only with meals that are not business-related
entertainment.
Lavish or extravagant.
You cannot deduct expenses for meals that are lavish or extravagant. An expense is not considered lavish or extravagant
if it is reasonable based
on the facts and circumstances. Expenses will not be disallowed merely because they are more than a fixed dollar amount or
take place at deluxe
restaurants, hotels, nightclubs, or resorts.
50% limit on meals.
You can figure your meals expense using either of the following methods.
Both of these methods are explained below. But, regardless of the method you use, you generally can deduct only 50% of the
unreimbursed cost of
your meals.
If you are reimbursed for the cost of your meals, how you apply the 50% limit depends on whether your employer's reimbursement
plan was accountable
or nonaccountable. If you are not reimbursed, the 50% limit applies whether the unreimbursed meal expense is for business
travel or business
entertainment. Chapter 2 discusses the 50% limit in more detail, and chapter 6 discusses accountable and nonaccountable plans.
You can use the actual cost of your meals to figure the amount of your expense before reimbursement and application of the
50% deduction limit. If
you use this method, you must keep records of your actual cost.
Generally, you can use the “standard meal allowance” method as an alternative to the actual cost method. It allows you to use a set amount for
your daily meals and incidental expenses (M&IE), instead of keeping records of your actual costs. The set amount varies depending
on where and
when you travel. In this publication, “standard meal allowance” refers to the federal rate for M&IE, discussed later under Amount of
standard meal allowance. If you use the standard meal allowance, you still must keep records to prove the time, place, and business purpose of
your travel. See the recordkeeping rules for travel in chapter 5.
Incidental expenses.
The term “ incidental expenses” means:
-
Fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships, and
hotel servants in
foreign countries,
-
Transportation between places of lodging or business and places where meals are taken, if suitable meals can be obtained at
the temporary
duty site, and
-
Mailing costs associated with filing travel vouchers and payment of employer-sponsored charge card billings.
Incidental expenses do not include expenses for laundry, cleaning and pressing of clothing, lodging taxes, or the costs of
telegrams or
telephone calls.
Incidental expenses only method.
You can use an optional method (instead of actual cost) for deducting incidental expenses only. The amount of the
deduction is $3 a day for
incidental expenses paid or incurred for travel away from home in 2005. You can use this method only if you did not pay or
incur any meal expenses.
You cannot use this method on any day that you use the standard meal allowance. This method is subject to the proration rules
for partial days. See
Travel for days you depart and return, later in this chapter.
Federal employees should refer to the Federal Travel Regulations at
www.gsa.gov. Click on “Per Diem Rates,” then on “Federal Travel Regulation (FTR) Overview” for changes
affecting claims for reimbursement of these expenses.
50% limit may apply.
If you use the standard meal allowance method for meal expenses and you are not reimbursed or you are reimbursed under
a nonaccountable plan, you
can generally deduct only 50% of the standard meal allowance. If you are reimbursed under an accountable plan and you are
deducting amounts that are
more than your reimbursements, you can deduct only 50% of the excess amount. The 50% limit is discussed in more detail in
chapter 2, and accountable
and nonaccountable plans are discussed in chapter 6.
There is no optional standard lodging amount similar to the standard meal allowance. Your allowable lodging expense
deduction is your actual cost.
Who can use the standard meal allowance.
You can use the standard meal allowance whether you are an employee or self-employed, and whether or not you are reimbursed
for your traveling
expenses.
Use of the standard meal allowance for other travel.
You can use the standard meal allowance to figure your meal expenses when you travel in connection with investment
and other income-producing
property. You can also use it to figure your meal expenses when you travel for qualifying educational purposes. You cannot
use the standard meal
allowance to figure the cost of your meals when you travel for medical or charitable purposes.
Amount of standard meal allowance.
The standard meal allowance is the federal M&IE rate. For travel in 2005, the rate for most small localities in the
United States is $31 a day
from January 1, 2005, through September 30, 2005, and $39 a day from October 1, 2005, through December 31, 2005.
Most major cities and many other localities in the United States are designated as
high-cost areas, qualifying for higher standard meal allowances. These rates are listed in Publication 1542, which is available
on the Internet at
www.irs.gov.
You can also find this information on the Internet at
www.gsa.gov. Click on “ Per Diem Rates,” then select “ 2005” for the period January 1, 2005 - September
30, 2005, and select “ 2006” for the period October 1, 2005 - December 31, 2005. However, you can apply the rates in effect before October
1, 2005, for expenses of all travel within the United States for 2005 instead of the updated rates. You must consistently
use either the rates for the
first 9 months of 2005 or the updated rates for the period of October 1, 2005, through December 31, 2005.
If you travel to more than one location in one day, use the rate in effect for the area where you stop for sleep or
rest. If you work in the
transportation industry, however, see Special rate for transportation workers, later.
Standard meal allowance for areas outside the continental United States.
The standard meal allowance rates do not apply to travel in Alaska, Hawaii, or any other locations outside the continental
United States. The
federal per diem rates for these locations are published monthly in the Maximum Travel Per Diem Allowances for Foreign Areas.
You can access foreign per diem rates at
www.state.gov/m/a/als/prdm.
Your employer may have these rates available, or you can purchase the publication from the:
Superintendent of Documents
U.S. Government Printing Office
P.O. Box 371954
Pittsburgh, PA 15250-7954
You can also order it by calling the Government Printing Office at 1-202-512-1800 (not a toll-free number).
Special rate for transportation workers.
You can use a special standard meal allowance if you work in the transportation industry. You are in the transportation
industry if your work:
-
Directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and
-
Regularly requires you to travel away from home and, during any single trip, usually involves travel to areas eligible for
different
standard meal allowance rates.
If this applies to you, you can claim a standard meal allowance of $41 a day ($46 for travel outside the continental United
States) from
January 1, 2005, through September 30, 2005, and $52 a day ($58 for travel outside the continental United States) from October
1, 2005, through
December 31, 2005.
Using the special rate for transportation workers eliminates the need for you to determine the standard meal allowance
for every area where you
stop for sleep or rest. If you choose to use the special rate for any trip, you must use the special rate (and not use the
regular standard meal
allowance rates) for all trips you take that year.
Travel for days you depart and return.
For both the day you depart for and the day you return from a business trip, you must prorate the standard meal allowance
(figure a reduced amount
for each day). You can do so by one of two methods.
Example.
Jen is employed in New Orleans as a convention planner. In March, her employer sent her on a 3-day trip to Washington, DC,
to attend a planning
seminar. She left her home in New Orleans at 10 a.m. on Wednesday and arrived in Washington, DC, at 5:30 p.m. After spending
two nights there, she
flew back to New Orleans on Friday and arrived back home at 8:00 p.m. Jen's employer gave her a flat amount to cover her expenses
and included it with
her wages.
Under Method 1, Jen can claim 2½ days of the standard meal allowance for Washington, DC: ¾ of the daily
rate for Wednesday and Friday (the days she departed and returned), and the full daily rate for Thursday.
Under Method 2, Jen could also use any method that she applies consistently and that is in accordance with reasonable business practice.
For example, she could claim 3 days of the standard meal allowance even though a federal employee would have to use Method 1 and be limited
to only 2½ days.
Travel in the United States
The following discussion applies to travel in the United States. For this purpose, the United States includes the 50 states
and the District of
Columbia. The treatment of your travel expenses depends on how much of your trip was business related and on how much of your
trip occurred within the
United States. See Part of Trip Outside the United States, later.
Trip Primarily for Business
You can deduct all of your travel expenses if your trip was entirely business related. If your trip was primarily for business
and, while at your
business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities,
you can deduct your
business-related travel expenses. These expenses include the travel costs of getting to and from your business destination
and any business-related
expenses at your business destination.
Example.
You work in Atlanta and take a business trip to New Orleans. On your way home, you stop in Mobile to visit your parents. You
spend $1,070 for the 9
days you are away from home for travel, meals, lodging, and other travel expenses. If you had not stopped in Mobile, you would
have been gone only 6
days, and your total cost would have been $920. You can deduct $920 for your trip, including the cost of round-trip transportation
to and from New
Orleans. The deduction for your meals is subject to the 50% limit on meals mentioned earlier.
Trip Primarily for Personal Reasons
If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal
expense. However, you
can deduct any expenses you have while at your destination that are directly related to your business.
A trip to a resort or on a cruise ship may be a vacation even if the promoter advertises that it is primarily for business.
The scheduling of
incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects,
will not change what is
really a vacation into a business trip.
Part of Trip Outside the United States
If part of your trip is outside the United States, use the rules described later in this chapter under Travel Outside the United States
for that part of the trip. For the part of your trip that is inside the United States, use the rules for travel in the United
States. Travel
outside the United States does not include travel from one point in the United States to another point in the United States.
The following discussion
can help you determine whether your trip was entirely within the United States.
Public transportation.
If you travel by public transportation, any place in the United States where that vehicle makes a scheduled stop is
a point in the United States.
Once the vehicle leaves the last scheduled stop in the United States on its way to a point outside the United States, you
apply the rules under
Travel Outside the United States.
Example.
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
United States, so only the flight from Miami to Puerto Rico is outside the United States. Because there are no scheduled stops
between Puerto Rico and
New York, all of the return trip is outside the United States.
Private car.
Travel by private car in the United States is travel between points in the United States, even though you are on your
way to a destination outside
the United States.
Example.
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
United States, and the rules in this section apply. The rules under Travel Outside the United States apply to your trip from the border to
Mexico City and back to the border.
Travel Outside the United States
If any part of your business travel is outside the United States, some of your deductions for the cost of getting to and from
your destination may
be limited. For this purpose, the United States includes the 50 states and the District of Columbia.
How much of your travel expenses you can deduct depends in part upon how much of your trip outside the United States was business
related.
Travel Entirely for Business or Considered Entirely for Business
You can deduct all your travel expenses of getting to and from your business destination if your trip is entirely for business
or considered
entirely for business.
Travel entirely for business.
If you travel outside the United States and you spend the entire time on business activities, you can deduct all of
your travel expenses.
Travel considered entirely for business.
Even if you did not spend your entire time on business activities, your trip is considered entirely for business if
you meet at least one of the
following four exceptions.
Exception 1 - No substantial control.
Your trip is considered entirely for business if you did not have substantial control over arranging the trip. The
fact that you control the timing
of your trip does not, by itself, mean that you have substantial control over arranging your trip.
You do not have substantial control over your trip if you:
-
Are an employee who was reimbursed or paid a travel expense allowance,
-
Are not related to your employer, and
-
Are not a managing executive.
“ Related to your employer” is defined later in chapter 6 under Per Diem and Car Allowances.
A “ managing executive” is an employee who has the authority and responsibility, without being subject to the veto of another, to decide on the
need for the business travel.
A self-employed person generally has substantial control over arranging business trips.
Exception 2 - Outside United States no more than a week.
Your trip is considered entirely for business if you were outside the United States for a week or less, combining
business and nonbusiness
activities. One week means seven consecutive days. In counting the days, do not count the day you leave the United States,
but do count the day you
return to the United States.
Example.
You traveled to Brussels primarily for business. You left Denver on Tuesday and flew to New York. On Wednesday, you flew from
New York to Brussels,
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 United States for more than
a week. This is because
the day you depart does not count as a day outside the United States.
You can deduct your cost of the round-trip flight between Denver and Brussels. You can also deduct the cost of your stay in
Brussels for Thursday
and Friday while you conducted business. However, you cannot deduct the cost of your stay in Brussels from Saturday through
Tuesday because those days
were spent on nonbusiness activities.
Exception 3 - Less than 25% of time on personal activities.
Your trip is considered entirely for business if:
-
You were outside the United States for more than a week, and
-
You spent less than 25% of the total time you were outside the United States on nonbusiness activities.
For this purpose, count both the day your trip began and the day it ended.
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.
Exception 4 - Vacation not a major consideration.
Your trip is considered entirely for business if you can establish that a personal vacation was not a major consideration,
even if you have
substantial control over arranging the trip.
Travel Primarily for Business
If you travel outside the United States primarily for business but spend some of your time on other activities, you generally
cannot deduct all of
your travel expenses. You can only deduct the business portion of your cost of getting to and from your destination. You must
allocate the costs
between your business and other activities to determine your deductible amount. See Travel allocation rules, later.
You do not have to allocate your travel expenses if you meet one of the four exceptions listed earlier under Travel considered
entirely for
business. In those cases, you can deduct the total cost of getting to and from your destination.
Travel allocation rules.
If your trip outside the United States was primarily for business, you must allocate your travel time on a day-to-day
basis between business days
and nonbusiness days. The days you depart from and return to the United States are both counted as days outside the United
States.
To figure the deductible amount of your round-trip travel expenses, use the following fraction. The numerator (top
number) is the total number of
business days outside the United States. The denominator (bottom number) is the total number of travel days outside the United
States.
Counting business days.
Your business days include transportation days, days your presence was required, days you spent on business, and certain
weekends and holidays.
Transportation day.
Count as a business day any day you spend traveling to or from a business destination. However, if because of a nonbusiness
activity you do not
travel by a direct route, your business days are the days it would take you to travel a reasonably direct route to your business
destination. Extra
days for side trips or nonbusiness activities cannot be counted as business days.
Presence required.
Count as a business day any day your presence is required at a particular place for a specific business purpose. Count
it as a business day even if
you spend most of the day on nonbusiness activities.
Day spent on business.
If your principal activity during working hours is pursuit of your trade or business, count the day as a business
day. Also, count as a business
day any day you are prevented from working because of circumstances beyond your control.
Certain weekends and holidays.
Count weekends, holidays, and other necessary standby days as business days if they fall between business days. But
if they follow your business
meetings or activity and you remain at your business destination for nonbusiness or personal reasons, do not count them as
business days.
Example 1.
Your tax home is New York City. You travel to Quebec, where you have a business appointment on Friday. You have another appointment
on the
following Monday. Because your presence was required on both Friday and Monday, they are business days. Because the weekend
is between business days,
Saturday and Sunday are counted as business days. This is true even though you use the weekend for sightseeing, visiting friends,
or other nonbusiness
activity.
Example 2.
If, in Example 1, you had no business in Quebec after Friday, but stayed until Monday before starting home, Saturday and Sunday would be
nonbusiness days.
Nonbusiness activity on the way to or from your business destination.
If you stopped for a vacation or other nonbusiness activity either on the way from the United States to your business
destination, or on the way
back to the United States from your business destination, you must allocate part of your travel expenses to the nonbusiness
activity.
The part you must allocate is the amount it would have cost you to travel between the point where travel outside the
United States begins and your
nonbusiness destination and a return to the point where travel outside the United States ends.
You determine the nonbusiness portion of that expense by multiplying it by a fraction. The numerator of the fraction
is the number of nonbusiness
days during your travel outside the United States and the denominator is the total number of days you spend outside the United
States.
Example.
You live in New York. On May 4 you flew to Paris to attend a business conference that began on May 5. The conference ended
at noon on May 14. That
evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New
York. The primary purpose
for the trip was to attend the conference.
If you had not stopped in Dublin, you would have arrived home the evening of May 14. You did not meet any of the exceptions
that would allow you to
consider your travel entirely for business. May 4 through May 14 (11 days) are business days and May 15 through May 21 (7
days) are nonbusiness days.
You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while
in Paris.
You cannot deduct your expenses while in Dublin. You also cannot deduct 7/18 of what it would have cost you to travel round-trip
between New York and Dublin.
You paid $450 to fly from New York to Paris, $200 to fly from Paris to Dublin, and $500 to fly from Dublin back to New York.
Round trip airfare
from New York to Dublin would have been $850.
You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you
would
have had in traveling directly between New York and Dublin ($850 × 7/18 = $331) from your total expenses in traveling from
New York
to Paris to Dublin and back to New York ($450 + $200 + $500 = $1,150).
Your deductible air travel expense is $819 ($1,150 - $331).
Nonbusiness activity at, near, or beyond business destination.
If you had a vacation or other nonbusiness activity at, near, or beyond your business destination, you must allocate
part of your travel expenses
to the nonbusiness activity.
The part you must allocate is the amount it would have cost you to travel between the point where travel outside the
United States begins and your
business destination and a return to the point where travel outside the United States ends.
You determine the nonbusiness portion of that expense by multiplying it by a fraction. The numerator of the fraction
is the number of nonbusiness
days during your travel outside the United States and the denominator is the total number of days you spend outside the United
States.
None of your travel expenses for nonbusiness activities at, near, or beyond your business destination are deductible.
Example.
Assume that the dates are the same as in the previous example but that instead of going to Dublin for your vacation, you fly
to Venice, Italy, for
a vacation.
You cannot deduct any part of the cost of your trip from Paris to Venice and return to Paris. In addition, you cannot deduct
7/18 of
the airfare and other expenses from New York to Paris and back to New York.
You can deduct 11/18 of the round-trip plane fare and other travel expenses from New York to Paris, plus your meals (subject
to the
50% limit), lodging, and any other business expenses you had in Paris. (Assume these expenses total $900). If the round-trip
plane fare and other
travel-related expenses (such as food during the trip) are $800 from New York to Paris, you can deduct travel costs of $489
(11/18
× $800), plus the full $900 for the expenses you had in Paris.
Other methods.
You can use another method of counting business days if you establish that it more clearly reflects the time spent
on other than business
activities outside the United States.
Travel Primarily for Personal Reasons
If you travel outside the United States primarily for vacation or for investment purposes, the entire cost of the trip is
a nondeductible personal
expense. If you spend some time attending brief professional seminars or a continuing education program, you can deduct your
registration fees and
other expenses you have that are directly related to your business.
Example.
The university from which you graduated has a continuing education program for members of its alumni association. This program
consists of trips to
various foreign countries where academic exercises and conferences are set up to acquaint individuals in most occupations
with selected facilities in
several regions of the world. However, none of the conferences are directed toward specific occupations or professions. It
is up to each participant
to seek out specialists and organizational settings appropriate to his or her occupational interests.
Three-hour sessions are held each day over a 5-day period at each of the selected overseas facilities where participants can
meet with individual
practitioners. These sessions are composed of a variety of activities including workshops, mini-lectures, role playing, skill
development, and
exercises. Professional conference directors schedule and conduct the sessions. Participants can choose those sessions they
wish to attend.
You can participate in this program since you are a member of the alumni association. You and your family take one of the
trips. You spend about 2
hours at each of the planned sessions. The rest of the time you go touring and sightseeing with your family. The trip lasts
less than 1 week.
Your travel expenses for the trip are not deductible since the trip was primarily a vacation. However, registration fees and
any other incidental
expenses you have for the five planned sessions you attended that are directly related and beneficial to your business are
deductible business
expenses. These expenses should be specifically stated in your records to ensure proper allocation of your deductible business
expenses.
If you travel by ocean liner, cruise ship, or other form of luxury water transportation for business purposes, there is a
daily limit on the amount
you can deduct. The limit is twice the highest federal per diem rate allowable at the time of your travel. (Generally, the
federal per diem is the
amount paid to federal government employees for daily living expenses when they travel away from home, but in the United States,
for business
purposes.)
Daily limit on luxury water travel.
The highest federal per diem rate allowed and the daily limit for luxury water travel in 2005 is shown in the following
table.
| |
Highest
|
|
Daily Limit
|
|
2005
|
Federal
|
|
on Luxury
|
| Dates |
Per Diem |
|
Water Travel |
|
Jan. 1 - March 31
|
$296
|
|
$592
|
|
April 1 - April 30
|
228
|
|
456
|
|
May 1 - June 30
|
251
|
|
502
|
|
July 1 - August 31
|
246
|
|
492
|
|
Sept. 1 - Sept. 30
|
259
|
|
518
|
|
Oct. 1 - Nov. 30
|
290
|
|
580
|
|
Dec. 1 - Dec. 31
|
344
|
|
688
|
Example.
Caroline, a travel agent, traveled by ocean liner from New York to London, England, on business in May. Her expense for the
6-day cruise was
$3,500. Caroline's deduction for the cruise cannot exceed $3,012 (6 days × $502 daily limit).
Meals and entertainment.
If your expenses for luxury water travel include separately stated amounts for meals or entertainment, those amounts
are subject to the 50% limit
on meals and entertainment before you apply the daily limit. For a discussion of the 50% limit, see chapter 2.
Example.
In the previous example, Caroline's luxury water travel had a total cost of $3,500. Of that amount, $1,600 was separately
stated as meals and
entertainment. Caroline, who is self-employed, is not reimbursed for any of her travel expenses. Caroline figures her deductible
travel expenses as
follows.
|
Meals and entertainment
|
$1,600
|
|
|
50% limit
|
× .50
|
|
|
Allowable meals & entertainment
|
$ 800
|
|
|
Other travel expenses
|
+ 1,900
|
|
|
Allowable cost before the daily limit
|
$2,700
|
|
Daily limit for May 2005
|
$502
|
|
|
Times number of days
|
× 6
|
|
|
Maximum luxury water travel deduction
|
$3,012
|
| Amount of allowable deduction |
$2,700
|
Caroline's deduction for her cruise is limited to $2,700, even though the limit on luxury water travel is higher.
Not separately stated.
If your meal or entertainment charges are not separately stated or are not clearly identifiable, you do not have to
allocate any portion of the
total charge to meals or entertainment.
The daily limit on luxury water travel (discussed earlier) does not apply to expenses you have to attend a convention, seminar,
or meeting on board
a cruise ship. See Cruise Ships under Conventions Held Outside the North American Area.
You can deduct your travel expenses when you attend a convention if you can show that your attendance benefits your trade
or business. You cannot
deduct the travel expenses for your family.
If the convention is for investment, political, social, or other purposes unrelated to your trade or business, you cannot
deduct the expenses.
Your appointment or election as a delegate does not, in itself, determine whether you can deduct travel expenses. You can
deduct your travel
expenses only if your attendance is connected to your own trade or business.
Convention agenda.
The convention agenda or program generally shows the purpose of the convention. You can show your attendance at the
convention benefits your trade
or business by comparing the agenda with the official duties and responsibilities of your position. The agenda does not have
to deal specifically with
your official duties and responsibilities; it will be enough if the agenda is so related to your position that it shows your
attendance was for
business purposes.
Conventions Held Outside the North American Area
You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless:
-
The meeting is directly related to your trade or business, and
-
It is as reasonable to hold the meeting outside the North American area as in it.
If the meeting meets these requirements, you also must satisfy the rules for deducting expenses for business trips in general,
discussed
earlier under Travel Outside the United States.
North American area.
The North American area includes the following locations.
|
American Samoa
|
Johnston Island
|
|
Antigua and Barbuda
|
Kingman Reef
|
|
Baker Island
|
Marshall Islands
|
|
Barbados
|
Mexico
|
|
Bermuda
|
Micronesia
|
|
Canada
|
Midway Islands
|
|
Costa Rica
|
Northern Mariana
|
|
Dominica
|
Islands
|
|
Dominican Republic
|
Palau
|
|
Grenada
|
Palmyra
|
|
Guam
|
Puerto Rico
|
|
Guyana
|
Saint Lucia
|
|
Honduras
|
Trinidad and Tobago
|
|
Howland Island
|
USA
|
|
Jamaica
|
U.S. Virgin Islands
|
|
Jarvis Island
|
Wake Island
|
| |
|
The North American area also includes U.S. islands, cays, and reefs that are possessions of the United States and not part
of the fifty states
or the District of Columbia.
Reasonableness test.
The following factors are taken into account to determine if it was reasonable to hold the meeting outside the North
American area.
-
The purpose of the meeting and the activities taking place at the meeting.
-
The purposes and activities of the sponsoring organizations or groups.
-
The homes of the active members of the sponsoring organizations and the places at which other meetings of the sponsoring organizations
or
groups have been or will be held.
-
Other relevant factors you may present.
You can deduct up to $2,000 per year of your expenses of attending conventions, seminars, or similar meetings held on cruise
ships. All ships that
sail are considered cruise ships.
You can deduct these expenses only if all of the following requirements are met.
-
The convention, seminar, or meeting is directly related to your trade or business.
-
The cruise ship is a vessel registered in the United States.
-
All of the cruise ship's ports of call are in the United States or in possessions of the United States.
-
You attach to your return a written statement signed by you that includes information about:
-
The total days of the trip (not including the days of transportation to and from the cruise ship port),
-
The number of hours each day that you devoted to scheduled business activities, and
-
A program of the scheduled business activities of the meeting.
-
You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that
includes:
-
A schedule of the business activities of each day of the meeting, and
-
The number of hours you attended the scheduled business activities.
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