Understanding the subtle intricacies of business travel deduction rules can help you save thousands of dollars. Tax the quiz.
The money you spend on business travel is deductible as long as it’s used to carry out a business activity.
Money spent during business travel on personal activities, by contrast, is not deductible.
However, the normal allocation of business travel costs between business and personal expenses is not required for business travel on a cruise ship, that’s outside the 50 states for seven days or less.
Result: Turning a jet business trip into a cruise may not only be more relaxing, but may also make your entire trip deductible.
NOTE: All rules and deductions discussed in this article are accurate as spring 2019. However, always consult your tax advisor when planning to take deductions for business travel.
All the effort that your client, Ty Tannick, has spent chasing prospective billionaire client Lou Sitania is about to pay off. But before signing on the dotted line, Lou wants Ty to pay him a visit at his home in the U.S. Virgin Islands. It’s a long way from home. But doggone it, if landing a big client means leaving chilly Boston to travel to the Caribbean in mid-February, it’s a price Ty is willing to pay. So Ty books a five-day cruise to St. Thomas and brings his wife. Upon arriving in St. Thomas, Ty stays in a hotel for two days while holding meetings with Lou.
In preparing his tax return, Ty allocates the time he spent on the trip as 30 percent business, 70 percent personal.
What, if anything, can Ty deduct for business travel costs?
100 percent of his total costs.
30 percent of his transportation costs and 30 percent of his costs for food and lodging.
100 percent of his transportation costs and 30 percent of his costs for food and lodging.
Zero percent since the trip isn’t deductible business travel.
Ty can claim deductions for 100 percent of his total costs (subject to the daily deduction limits for cruises).
There are two kinds of deductible costs you incur when you travel on business:
Business-day costs: the costs of sustaining life during a business day, including meals, snacks, drinks, cab rides and lodging; and
Transportation costs: the costs of traveling to and from a business destination.
You normally have to allocate expenses between business and personal activity and can deduct only the former. But this scenario illustrates an important exception: Deductions for business travel expenses are not subject to the normal allocation between business and personal activity when you:
Travel to a destination outside the 50 states and the District of Columbia;
Travel for seven days or less (not counting the day of departure); and
Goes via a cruise ship.
Ty’s trip meets all three of these conditions. He could (and should) have deducted 100 percent of his total travel costs; therefore, A is the right answer.
Why the Wrong Answers (above) Are Wrong
If you answered B above—30 percent of his transportation costs and 30 percent of his costs for food and lodging—then you are wrong. That’s because deductibility of business transportation costs varies depending on two factors:
Factor 1. U.S. vs. Foreign Travel. IRS regulations distinguish between two kinds of business travel for purposes of deductible transportation costs:
Travel inside the 50 United States; and
Travel outside the 50 United States.
Ty’s trip to St. Thomas clearly qualifies as travel outside the U.S.
Factor 2. Length of Trip. For business travel outside the U.S., you must look at how long the trip lasted to determine deductibility. The key question: Did you work at least one day and travel for seven days or less, not counting the day of departure?
Seven days or less foreign travel: If the answer is YES, you can deduct 100 percent of the cost of your direct route transportation costs of getting to and from the business destination.
Seven days or more foreign travel: If the answer is NO, then you only qualify for a 100 percent deduction if you pass the 76/24 test; that is, if you spent more than 75 percent of the days on business, not excluding the day of departure.
Ty did, in fact, work at least one day and travel for seven days or less. So his direct route transportation costs are 100 percent deductible.
If you answered C to the question at the beginning of this article—100 percent of his transportation costs and 30 percent for food and lodging—then you are wrong as well. That’s because Ty’s food and lodging costs are also 100 percent deductible. As we explained earlier, Ty’s transportation costs (i.e., the costs of the cruise) are 100 percent deductible. But we also said earlier that food, lodging and the other costs of sustaining life during a business day must be allocated between personal and business purposes. So what gives?
If Ty had traveled to St. Thomas by airplane, he’d have to allocate his food, lodging and other life-sustaining expenses 70/30 and deduct only 30 percent. The reason he can deduct these costs at 100 percent is because he traveled by cruise ship.
Think about it. When you pay for a cruise, your costs include not only the transport, but meals, lodging and other costs of sustaining life (assuming, of course, these items aren’t broken out as part of the cruise’s cost). In essence, these costs become part of the costs of transportation. So if transportation is 100 percent deductible, then so are the meals, lodging and other life-sustaining costs associated with it!
The moral: In addition to being more pleasurable than flying—at least for many people—traveling to a business destination by cruise ship can significantly increase your business travel deductions.
If you answered D to the question at the beginning of this article—Zero percent since the trip isn’t deductible business travel—then you are wrong again. That’s because the mode of transportation doesn’t determine deductibility. In other words, you can claim business travel deductions regardless of whether you travel to and from your business destination by car, plane, train or boat.
However, deductions for business travel by cruise ship are subject to luxury water-travel daily deductions limits.
The costs of business travel are deductible. But the rules are complicated and significant limitations apply—like the requirement that you allocate certain costs between business and personal use. So it’s essential that you and your financial advisors know the rules about business travel deductions.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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