Business trips, conventions, and seminars are frequently planned to incorporate exotic places located outside of the United States and its territories. However, if any part of the business travel is outside the U.S., some of the deductions for the cost of getting to or from the destination may be limited. The determination of how much of the travel expenses are deductible depends partially on how much of the trip outside the United States was business related.
If you travel outside the United States and spend your entire time on business activities, you may deduct all of the travel expenses you incurred getting to and from your business destination, as well as lodging and 50 percent of meal costs. If the purpose of the trip is primarily personal, none of the travel costs are deductible, even if some business is conducted.
Where the purpose of the trip is primarily for business but some nonbusiness (vacation type) activities are also engaged in, the deductible business expenses generally must be allocated in proportion to the business versus nonbusiness days. However, there are a few “safe harbors” provided in regards to the cost of getting to and from your business destination. Taxpayers who (a) travel outside the U.S. for less than one week for both the business and nonbusiness activities, (b) do not have substantial control over arranging the trip, or (c) can establish that a personal vacation was not a major consideration of the trip can fall under one of the safe harbors. There is also a safe harbor for taxpayers who spend more than one week outside the U.S., but spend less than 25% of the total time they were outside the U.S. on nonbusiness activities. If a safe harbor is met, the taxpayer can deduct the total cost of getting to and from the business destination.
Even if you qualify for one of the safe harbors in regards to the trip’s destination expenses, you cannot deduct other travel costs incurred during nonbusiness days. The general rule is to allocate other travel expenses incurred between business and nonbusiness on a day-to-day basis. Destination expenses would also be allocated this way if a safe harbor is not met. For these travel expense allocation rules, each day is either entirely for business, or it is considered to be a nonbusiness day. A day counts as entirely for business if the taxpayer’s principal activity on such day was the pursuit of a trade or business. A day is also counted as a business day if any of the following factors are present:
- The individual was traveling to or from a direct overseas destination in pursuit of a trade or business.
- The individual’s presence outside the U.S. on that day was required at a particular place for a specific and bona fide business purpose.
- The individual was prevented on that day from engaging in the conduct of his or her principal business activity due to circumstances beyond his control.
- The day was a Saturday, Sunday, or legal holiday or other reasonably necessary stand-by day, if they fall between business days.
Please note that there are special rules for conventions on cruise ships. There are limited deductions available only if the ship is of U.S. registry, all ports of call are in the U.S. or its possessions, and the meeting is directly related to the taxpayer’s trade or business. Other strict documentation regarding the cruise is required. There are also daily limitations on the amount you can deduct related to luxury water travel.
You also 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 reasonable to hold the meeting outside North America.
The rules relating to the deductibility of foreign business travel are complicated. However, with a little planning and record keeping, you can maximize your potential tax deductions of the foreign trip. Don’t forget your passport! For more information contact Joe Wondra at firstname.lastname@example.org or your MarksNelson professional.