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Business Travel 101
What constitutes business travel? In my discussions with people it is remarkable that there is so much misunderstanding in this regard. One thing to consider whenever you are discussing business travel is that “words mean things”.
Never refer to a legitimate business trip as a vacation or personal travel, even in jest. That will immediately throw up a huge red flag and will invalidate your business trip expenses.
Travel, to be counted as business travel, has been ruled upon and defined by the US Supreme Court in a 5-3 decision. They said that “in order for the taxpayer to be allowed to deduct the cost of his meals incurred while on a business trip, the trip must have required him to stop for sleep or rest.” Click HERE to see the wikipedia article on this decision.
That makes it pretty clear on what would be considered business travel, right? It has to require a sleep over!
Let me give you two scenarios regarding this issue.
I have purchased a booth space as an exhibitor for an Expo in Dallas on Tuesday morning.
 Scenario 1 - I leave Austin on Monday evening and drive to Dallas where I spend the night with a friend (no hotel cost you see). That way if I have car trouble, traffic is bad or the alarm doesn’t go off, I will still be able to set my booth up before the crowd starts arriving.Scenario 2 - IF, I leave early Tuesday morning none of my meals throughout the day would be deductible at any percentage, because the IRS would not consider this a business trip. The booth, candy and mileage would all be deductible, because they are normal business expenses associated to my advertising with a booth.
By staying overnight the meal Monday night while driving to Dallas and all my food on Tuesday, before arriving back in Austin, would be deductible at 50%. The booth expense, candy offered freely at my booth and other business related expenses would be deductible as well.
In both scenarios the ‘ordinary and necessary expenses’ would be deductible as would your mileage to and from the event. Those ‘ordinary and necessary expenses’ would include the cost of the booth and the candy you provided for the attendees. Other expenses might include related expenses for manning the booth such as electricity, internet connection, flyers, etc.
Travel expenses are a favorite deduction of many people, because they love to travel and especially enjoy it when the IRS is subsidizing part of the expense. In order to deduct travel expenses, however, you must show that the expense has a business purpose and is ordinary and necessary to the business. Travel expenses that have business purpose include
· meeting customers, prospects or vendors,
· attending to your real estate interests,
· searching for investment property,
· attending education seminars related directly to your business,
· meeting with business partners, both current and prospective, and
· holding annual shareholder meetings (usually held in conjunction with an annual board meeting and an excellent reason to include your spouse as a board member).
Remember, the phrase ‘ordinary and necessary’ generally is defined to mean “in the ordinary course of business” and “the expense will contribute to the success of the business”. If a taxpayer travels to a destination and while at that destination engages in business and personal activities, traveling expenses to and from the destination are deductible only if the trip is related primarily to the taxpayer’s trade or business. If the trip is primarily personal in nature, the traveling expenses to and from the destination are not deductible even thought eh taxpayer engages in business activities while at such destination.
Expenses while at the destination which are directly related to the taxpayer’s trade or business are deductible even though the traveling expenses to and from the destination are not deductible. Whether a trip is related primarily to the business or is personal depends on the facts and circumstances in each case. The amount of time during the period of the trip that is spent on personal activity compared to the amount of time spent on business is an important factor in determining the deductibility of the travel expense. Generally, if business is conducted more than 50% of the time in an eight hour business day (Monday to Friday), the travel expense is deductible.
In other words, spend at least four hours and one minute each day of the week on your trip on business related tasks and the entire trip can legitimately be considered business.
If a spouse, dependent or other individual accompany you and they are not associated directly with the business, they are not deductible. However, if the spouse, dependent or other individual is an employee or partner in the business and there is a bona fide business purpose, then the travel expense id deductible. This means that you should hire your wife, or, if you can, make her a partner.
Cruise Travel
 Travel expenses involving a cruise ship typically are not deductible. However, they can be deductible if you are attending a convention on a cruise ship and you can show that attendance benefits your trade or business AND meets certain qualifying rules. No deductions for cruise ship expense are allowed for meetings related to personal investments, political causes or other purposes. The qualifying rules for business cruises are on page 9 of IRS Publication 463 and read as follows.
· The (cruise ship) convention, seminar, or meeting is directly related to your trade or business.
· The cruise ship is a vessel registered in the US.
· All the cruise ship’s ports of call are in the United States or in possessions of the US.
· You attach to your return a written statement signed by you that includes information about;
o The total days of the trip (not including the days of transportation to and from the cruise ship port).
o The number of hours each day that your devoted to scheduled business activities, and
o A program of the scheduled business activities of the meeting.
You can see from this list that it would be very difficult for a cruise to qualify as business travel. Cruise ships that are both registered in the US and stop only at US ports are VERY RARE.
If you are a travel agent, however, you will want to refer to page 8 of Publication 463 you will find an example. Caroline is a travel agent and travels from New York to London. The example laid out in on page 8 determines that of the $5200 she spends on the cruise she is allowed to deduct $4025. This figured is arrived at using the per diem table’s highest rate and is doubled. The per diem rate is $349 and the IRS document specifies that Caroline is allowed to deduct $698 per day. If you are a travel agent you should read this example closely and discuss it with your CPA. The trip MUST be a legitimate business trip and not personal travel.
Documentation
Business expenses require documentation. If the IRS finds the taxpayer does not have sufficient documentation, the expense will not be deductible and interest and a fine will be levied. For travel, you must document the amount, time, place and business purpose of the travel expense. It is recommended that you keep an itinerary of the business trip listing all business activities as documentation of the travel expense. The log should list all elements of the expense, e.g. amount, time place and business purpose as this has a great deal of credibility with the IRS. For travel, a receipt is not generally required if less than $75, EXCEPT for lodging. Those expenses MUST be documented with receipts.
Recommendation - Keep the proper receipts, keep an accurate log and write your business purposes down properly and neatly. In other words, keep a good tax diary. All of this is provided in your ExpenseDocs account. This will go a long way to validate your business trips and if you are ever audited you will have the necessary documentation to provide for the auditors. Nothing is worse than being put under the IRS microscope and having the barest of records, at best.
Per Diem
The taxpayer may deduct a standard allowance, or per diem, as set by the federal government for both lodging and meals and incidental expenses (M & IE ). M & IE expenses are those that are required for sustaining life such as food, laundry, etc. Instead of a receipt the business traveler would refer to the per diem table provided by the federal government and deduct be able to deduct up to, but not over, the allowance for both lodging and M & IE. This is an attractive solution to those of us that do not like to keep track of receipts. NOTE: The IRS WILL NOT allow business owners to use the full per diem deduction (not for lodging). They can deduct the M & IE’s on a legitimate business trip.
The per diem rate is a set deduction for travel within the United States, based on location, and is reset every September 30th. Access the per diem table at the IRS.GOV website by clicking HERE.
As always, be certain to check with your CPA, or tax preparation specialist, to verify the current laws regarding any and all tax deductible expenses related to travel and the per diem.
Weekend Travel
If you have the option to schedule meetings you might consider sandwiching weekends with business days. That will allow you to be at the location during the weekend, after and before business meetings, and deduct the entire trip. This will allow you to legitimately deduct your travel and enjoy a weekend at the business destination.
 This is allowed IF staying at the location of business is cheaper than returning to your business home for the weekend.For instance, you live in Austin and go to Seattle for business on Thursday, Friday and Monday. Air fare to return home will cost you more than a hotel and M&IE to remain in Seattle. Enjoy!
If, however, you are in Dallas for business on the same days, it might be cheaper for you to return to Austin for the weekend and go back on Monday. You might have some ‘splainin’ to do’ on that one. You might consideration the fact that you must return on Sunday night to avoid being late to the meeting due to traffic or breakdowns. This might make your stay over the weekend the more prudent and reasonable move. Call your CPA.
IMPORTANT NOTICE – The US Congress has provided many deductions to assist businesses and offer incentives to take the risks associated with starting a business. DO NOT avoid taking a legitimate tax deduction that they have provided you. Neither should you try to take advantage of the law and deduct items that you know to be inaccurate. Play by the rules! You will still save a great deal on your tax liability and you will sleep better at night. Consult with your tax professional regarding the information provided in this article to create a comprehensive tax plan.
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