IRS Material: Travel
Travel, Meals, and Entertainment
This section briefly explains the kinds of travel and entertainment expenses you can deduct on Schedule C or C-EZ.
Travel expenses. These are expenses you have while traveling away from home for your business. You are traveling away from home if:
1.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 2.You need to get sleep or rest to meet the demands of your work while away from home.
Generally, your tax home is your regular place of business, regardless of where you maintain your family home. It includes the entire city or general area in which your business is located.
The following is a brief summary of the expenses you can deduct.
Transportation. You can deduct the cost of airplane, train, or bus travel between your home and your business destination.
Taxi, commuter bus, and limousine. You can deduct fares for these and other types of transportation between the airport or station and your hotel, or between the hotel and your work location away from home.
Baggage and shipping. You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations.
Car or truck. You can deduct the costs of operating your vehicle when traveling away from home on business. You may deduct actual expenses or the standard mileage rate (discussed earlier under Car and Truck Expenses), including business-related tolls and parking. If you lease a car while away from home on business, you can deduct business-related expenses only.
Lodging. You can deduct the cost of lodging if your business trip is overnight or long enough to require you to get substantial sleep or rest to properly perform your duties.
Meals. You can deduct the cost of food, beverages, taxes, and related tips only if your business trip is overnight or long enough to require you to stop to get substantial sleep or rest. In most cases, you can deduct only 50% of these expenses.
Cleaning. You can dry deduct dry cleaning and laundry expenses while away from home overnight.
Telephone. You can deduct the cost of business calls while on your business trip, including business communication by fax machine or other communication devices.
Tips. You can deduct the tips you pay for any expenses listed above.
More information. For more information about travel expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. That publication also explains:
•How much you can deduct for travel outside the United States, •How much you can deduct for luxury water travel, •How much you can deduct for attending a convention, and •What records to keep.
Entertainment expenses. You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. In most cases, you can deduct only 50% of these expenses.
Examples of entertainment expenses are those for:
•Entertaining guests at nightclubs, athletic clubs, theaters, or sporting events, and •Providing meals, a hotel suite, or a car to business customers or their families.
To be deductible, the expenses must meet the rules listed in Table 8-1. For details about these rules, see Publication 463.
Reimbursing your employees for expenses. You generally can deduct the amount you reimburse your employees for travel and entertainment expenses. The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. For details, see chapter 16 in Publication 535. That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement.
Travel, Meals, and Entertainment
To be deductible, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses of carrying on your trade or business. Generally, you also must show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your trade or business.
The following discussion explains how you deduct any reimbursements or allowances you make for these expenses incurred by your employees. If you are self-employed and incur these expenses yourself, see Publication 463 for information on how you can deduct them.
Reimbursements
How you deduct a reimbursement or allowance arrangement (including per diem allowances, discussed later) for travel, meals, and entertainment expenses incurred by your employees depends on whether you have an accountable plan or a nonaccountable plan. A reimbursement or allowance arrangement is a system by which you substantiate and pay the advances, reimbursements, and charges for your employees' business expenses. If you make a single payment to your employees and it includes both wages and an expense reimbursement, you must specify the amount of the reimbursement.
If you reimburse these expenses under an accountable plan, deduct them as travel, meal, and entertainment expenses. If you reimburse these expenses under a nonaccountable plan, you must report the reimbursements as wages on Form W-2 and deduct them as wages. See Table 16-1, Reporting Reimbursements.
Accountable Plans
To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all of the following rules:
1.They must have paid or incurred deductible expenses while performing services as your employees, 2.They must adequately account to you for these expenses within a reasonable period of time, and 3.They must return any excess reimbursement or allowance within a reasonable period of time.
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A reasonable period of time depends on the facts and circumstances. Generally, you can consider the period reasonable if your employees adequately account for the expenses within 60 days after they pay or incur them and if they return any excess reimbursement within 120 days after they pay or incur the expense. Also, the period is considered reasonable if you give your employees a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so within 120 days.
If any expenses reimbursed under this arrangement are not substantiated, or are an excess reimbursement that is not returned within a reasonable period of time by an employee, you cannot treat these expenses as reimbursed under an accountable plan. Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later.
How to deduct. You can take a deduction for travel, meals, and entertainment if you reimburse your employees for these expenses under an accountable plan. The amount you reimburse for meals and entertainment, however, may be subject to a 50% limit, discussed later. If you are a sole proprietor, deduct the reimbursement on line 24 of Schedule C (Form 1040). If you file a corporation income tax return, include the reimbursement in the amount claimed on the "Other deductions" line of Form 1120 or Form 1120-A. If you file any other income tax return, such as a partnership or S Corporation return, deduct the reimbursement on the appropriate line of the return, as provided in the instructions for that return.
Reporting reimbursements
Per Diem or Other Fixed Allowance
You may reimburse your employees, under an accountable plan, based on travel days, miles, or some other fixed allowance. In these cases, your employee is considered to have accounted to you for the amount of the expense that does not exceed the rates established by the federal government. Your employee must actually substantiate to you the other elements of the expense, such as time, place, and business purpose.
For 1997, the standard mileage rate is 31.5 cents a mile for all business miles. However, see Revenue Procedure 96-63 in the 1996-2 Cumulative Bulletin for information on using a fixed and variable rate (FAVR) allowance. You can read Revenue Procedure 96-63 at many public libraries. The federal per diem rates for meals and lodging within the continental U.S. are listed in Publication 1542.
Reporting and deducting allowances. How you report and deduct the per diem allowance depends on whether it is more than the federal rate. For this purpose, the federal rate can be figured by using any of three methods:
1.The regular federal per diem rate (discussed later), 2.The high-low method (discussed later), or 3.The standard meal allowance (see chapter 1 in Publication 463).
Per diem allowance LESS than or EQUAL to the federal rate. If your per diem allowance for the employee is less than or equal to the federal rate, that allowance is not part of the employee's pay. Deduct the allowance as travel expenses (including meals that may be subject to the 50% limit, discussed later). See How to deduct under Accountable Plans, discussed earlier.
Per diem allowance MORE than the federal rate. If your employee's per diem allowance is more than the federal rate, you must report the allowance as two separate items.
You include the allowance amount up to the federal rate in box 13 (code L) of the employee's Form W-2. Deduct it as travel expenses (as explained above). This part of the allowance is treated as reimbursed under an accountable plan.
You include the allowance amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans.
Regular federal per diem rate. The regular federal per diem rate is the highest amount that the federal government will pay to its employees for lodging, meal, and incidental expenses (or meal and incidental expenses only) while they are traveling away from home in a particular area. The rates are different for different locations. Publication 1542 lists the rates in the continental U.S.
The federal rates for meal and incidental expenses are the same as those rates discussed under Standard Meal Allowance in chapter 1 in Publication 463.
High-low method. This is a simplified method of computing the federal per diem rate for travel within the continental United States. It eliminates the need to keep a current list of the per diem rate in effect for each city in the continental United States.
Under the high-low method, the per diem amount for travel during 1997 is $166 for certain locations. All other areas have a per diem amount of $109. The areas eligible for the $166 per diem amount under the high-low method are listed in Publication 1542.
Meals and Entertainment
Under an accountable plan, you can generally deduct only 50% of any otherwise deductible business-related meal and entertainment expenses that you reimburse your employees. The deduction limit applies even if you reimburse them for 100% of the expenses.
Application of the 50% limit. The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur while traveling away from home on business and for entertaining business customers at your place of business, a restaurant, or other location. It applies to attending a business convention or reception, business meeting, or business luncheon at a club. The deduction limit may also apply to meals you furnish on your premises to your employees (discussed in chapter 3).
Related expenses. Taxes and tips relating to expenses for a meal or entertainment activity that you reimburse to your employee under an accountable plan are included in the amount that is subject to the 50% limit. Reimbursements you make for expenses, such as cover charges for admission to a nightclub, rent paid for a room to hold a dinner or cocktail party, or the amount you pay for parking at a sports arena, are all subject to the 50% limit. However, the cost of transportation to and from a business meal or entertainment activity that is otherwise allowable is not subject to the 50% limit.
How to apply the 50% limit. If you provide your employees with a per diem allowance (discussed earlier) only for meal and incidental expenses, the amount treated as an expense for food and beverages is the lesser of:
1.The per diem allowance, or 2.The federal meal and incidental expense rate (M & IE).
If you provide your employee with a per diem allowance that covers lodging, meals, and incidental expenses, you must treat an amount equal to the federal M & IE rate for the area of travel as an expense for food and beverages. If the per diem allowance you provide for a full day of travel is less than the federal per diem rate for the area of travel you can treat 40% of the per diem allowance as the amount for food and beverages.
Drilling rigs. The 50% limit does not apply to the food or beverages an employer provides on an oil or gas platform or drilling rig located offshore or in Alaska. This exception also applies to meals provided by an employer at a support camp that is near and integral to an oil or gas drilling rig located in Alaska.
De minimis (minimal) fringe benefit. The 50% limit does not apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit. A de minimis benefit is one you provide your employees that is so small in value it would be unreasonable or impractical for you to account for it. You must consider the frequency with which you provide similar fringes to your employees in determining if the value is minimal. Although certain entertainment expenses, such as occasional tickets to the theater or sporting events, may qualify as a de minimis fringe benefit, this exception to the 50% limit does not apply to entertainment expenses.
Example. You operate an employee cafeteria for all your employees. The cafeteria is on your business premises and the prices you charge your employees cover the direct operating costs of the cafeteria. The cafeteria is considered a de minimis fringe benefit and you are not subject to the 50% limit for these expenses.
Company cafeteria or executive dining room. You can deduct the cost of food and beverages you provide primarily to your employees on your business premises. This includes the cost of maintaining the facilities for providing the food and beverages. These expenses are subject to the 50% limit unless they qualify as de minimis fringe benefits, discussed earlier.
Employee activities. You can deduct the expense of providing recreational, social, or similar activities (including the use of a facility) for your employees. The benefit must be primarily for your employees who are not highly compensated employees as defined in chapter 4 under Exclusion of Certain Fringe Benefits. These expenses are not subject to the 50% limit. For example, the expenses for food, beverages, and entertainment for a company-wide picnic are not subject to the 50% limit.
Nonaccountable Plans
A nonaccountable plan is an arrangement that does not meet the requirements for an accountable plan. All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. The payments are subject to income tax withholding, social security, Medicare, and federal unemployment taxes. You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees' pay in chapter 2. Deduct the allowable amount as compensation or wages on the appropriate line of your income tax return, as provided in its instructions.
Other Reimbursed Expenses
You may provide meals and entertainment expenses to individuals other than your employees. These expenses may or may not be subject to the 50% limit, depending on the circumstances.
Nonemployee. If you provide a person who is not your employee with meals, goods, services, or the use of a facility and the item you provide is considered entertainment, you can deduct the expense only to the extent it is included in the gross income of the recipient as compensation for services or as a prize or award. If you are required to include these expenses on an information return (Form 1099-MISC), you cannot claim a deduction for them unless you file the necessary information return. For more information about when to file Form 1099-MISC, see the separate Instructions for Forms 1099, 1098, 5498, and W-2G. These expenses are not subject to the 50% limit.
Director, stockholder, or employee meetings. You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. You can provide some minor social activities, but the main purpose of the meeting must be your company's business. These expenses are subject to the 50% limit.
Trade association meetings. You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain exempt organizations. These organizations can include business leagues, chambers of commerce, real estate boards, and trade and professional associations. These expenses are subject to the 50% limit.
Sale of meals or entertainment. You can deduct the cost of providing meals, entertainment, goods and services, or use of facilities that you sell to the public. For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is a business expense. These expenses are not subject to the 50% limit.
Advertising to promote goodwill. You can deduct the cost of providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. For example, the expense of sponsoring a television or radio show is deductible. You can also deduct the expense of distributing free food and beverages to the general public. These expenses are not subject to the 50% limit.
Charitable sports event. The 50% limit does not apply to the expenses covered by a package deal that includes a ticket to a charitable sports event. See Entertainment tickets in Publication 463 for a list of the conditions a charitable sports event must meet before you can deduct 100% of the cost of the package deal.
Chapter 1
Travel Expenses
If you temporarily travel away from your tax home, you can use this chapter to determine if you have deductible travel expenses. This chapter defines "tax home,""temporary," and different types of travel expenses, including the standard meal allowance. It also discusses the 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 business, trade, or profession. A necessary expense is one that is helpful and appropriate to your business. An expense does not have to be indispensable to be considered necessary. However, you cannot deduct expenses to the extent they are lavish or extravagant.
You will find examples of deductible travel expenses in Table 1.
Traveling away from home. You are traveling away from home if:
1.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 2.You need to get 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, and you can deduct travel expenses.
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, your trip is not considered as travel away from home. You cannot deduct travel expenses.
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What Are Travel Expenses?
Once you have determined that you are traveling away from your tax home, you can determine what travel expenses are deductible.
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When you travel away from home on business, you should keep records of all the expenses you incur 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 4.
Deductible Travel Expenses
Deductible travel expenses include those ordinary and necessary expenses you incur while traveling away from home on business. The type of expense you can deduct depends on the facts and your circumstances.
Table 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.
Additional rules on the cost of meals and on paying travel expenses for others are explained next.
Meals. You cannot deduct the cost of meals if it is not necessary for you to stop for sleep or rest to properly perform your duties unless you meet the rules for business entertainment. These rules are explained in chapter 2.
50% limit on meals. You can use either the actual cost of your meals or a standard amount to figure your meals expense. (See Standard Meal Allowance later in this chapter.) However, you can deduct only 50% of the cost of your unreimbursed business-related meals.
If you are reimbursed for these expenses, how you apply the 50% limit depends on whether your employer's reimbursement plan was accountable or nonaccountable. This 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.
Table 1. Deductible Travel
Lavish or extravagant. You cannot deduct expenses for meals to the extent they 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.
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. You can only deduct the travel expenses you pay or incur for an accompanying individual if that individual:
1.Is your employee, 2.Has a bona fide business purpose for the travel, and 3.Would otherwise be allowed to deduct the travel expenses.
Exception for business associate. If a business associate travels with you and meets the conditions in (2) and (3) above, you can claim the deductible travel expenses you pay for that person. A business associate is someone with whom you can reasonably expect to actively conduct business. It does not matter if you have already conducted business with the person as long as you reasonably expect to do so. A business associate can be a customer, client, supplier, employee, agent, partner, or professional advisor.
Bona fide business purpose. For a bona fide business purpose to exist, you must 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 warrant a deduction.
Example. Jerry drives to Chicago on business and takes his wife, Linda, with him. Linda is not Jerry's employee. Even if her presence serves a bona fide business purpose, her expenses are not deductible.
Jerry pays $115 a day for a double room. A single room costs $90 a day. He can deduct the total cost of driving his car to and from Chicago, but only $90 a day for his hotel room. If he uses public transportation, he can deduct only his fare.
Standard Meal Allowance
You generally can deduct a standard amount for your daily meals and incidental expenses (M&IE) while you are traveling away from home on business. Incidental expenses include, but are not limited to, your costs for the following items:
1.Laundry, dry cleaning, and pressing of clothing, and 2.Fees and tips for persons who provide services, such as food servers and luggage handlers.
Incidental expenses do not include taxicab fares or the costs of telegrams or telephone calls. In this publication, "standard meal allowance" refers to the federal rate for M&IE (meals and incidental expenses).
The standard meal allowance method is an alternative to the actual cost method. It allows you to deduct a set amount, depending on where and when you travel, instead of keeping records of your actual costs. 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.
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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. You cannot use the standard meal allowance, however, if you are related to your employer as defined next.
Related to employer. You are related to your employer if:
1.Your employer is your brother or sister, half-brother or half-sister, spouse, ancestor, or lineal descendant, 2.Your employer is a corporation in which you own, directly or indirectly, more than 10% in value of the outstanding stock, or 3.Certain fiduciary relationships exist between you and your employer involving grantors, trusts, beneficiaries, etc.
You may be considered to indirectly own stock, for purposes of (2), if you have an interest in a corporation, partnership, estate, or trust that owns the stock or if a family member or partner owns the stock.
Limit on standard meal allowance. If you are not reimbursed or if you are reimbursed under a nonaccountable plan for meal expenses, you can 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. Accountable and nonaccountable plans are discussed in chapter 6.
Other expenses that can qualify for the standard meal allowance. You can use the standard meal allowance to prove meal expenses you incur when traveling in connection with investment and other income-producing property. You can also use it to prove meal expenses you incur when traveling for qualifying educational purposes. You cannot use the standard meal allowance to prove the amount of your meals if you are traveling for medical or charitable purposes.
Amount of standard meal allowance. The standard meal allowance is the federal M&IE rate. For travel in 1997, the rate is $30 a day for most areas in the United States. Other locations in the United States are designated as high-cost areas, qualifying for higher standard meal allowances. Locations qualifying for rates of $34, $38, or $42 a day are listed in Appendix A.
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 in this section.
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.
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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
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You can also order it by calling the Government Printing Office at 1-202-512-1800 (not a toll-free number).
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Internet access. Per diem rates are also available on the Internet.
If you have a computer and a modem, you can access domestic per diem rates at:
www.policyworks.gov/perdiem
You can access foreign per diem rates at:
www.state.gov/www/perdiems
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:
1.Directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and 2.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 $36 a day standard meal allowance ($40 for travel outside the continental United States).
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, however, you must continue to 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 your travel begins and the day your travel ends, you must prorate the standard meal allowance. You can do so by one of two methods.
1.You can claim 3/4 of the standard meal allowance, or 2.You can use any method that you consistently apply and that is in accordance with reasonable business practice.
Example. Jen is employed in New Orleans as a convention planner. In March, her employer sent her on a three-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 2 1/2 days of the standard meal allowance for Washington, DC: 3/4 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 be limited to only 2 1/2 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.
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 nonbusiness side trip, or had other nonbusiness 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 $630 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 $580. You can deduct $580 for your trip, including the cost of round-trip transportation to and from New Orleans. The cost of 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 in this section. 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.
Private plane. If you travel by private plane, any trip, or part of a trip, for which both your takeoff and landing are in the United States is travel in the United States. This is true even if part of your flight is over a foreign country.
Example. You fly nonstop from Seattle to Juneau. Although the flight passes over Canada, the trip is considered to be travel in the United States. This is because both your takeoff and landing are in the United States.
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
Even if your trip is not entirely for business, it may be considered entirely for business if certain conditions are met.
Travel entirely for business. If you travel outside the United States and you spend the entire time on business activities, all your travel expenses of getting to and from your business destination are deductible.
Travel considered entirely for business. Even if you did not spend your entire time on business activities, your trip is considered entirely for business and you can deduct all of your business-related travel expenses 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. You are not considered to have substantial control merely because you have control over the timing of your trip.
You are considered not to have substantial control over your trip if you:
1.Are an employee who was reimbursed or paid a travel expense allowance, 2.Are not related to your employer, and 3.Are not a managing executive.
"Related to your employer" was defined earlier in this chapter under Standard Meal Allowance. 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 U.S. 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 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, but 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 not entirely for business. If you do not meet any of the above exceptions, you may still be able to deduct some of your expenses. See Travel Primarily for Business, next.
Travel Primarily for Business
If you travel outside the United States primarily for business purposes but spend some of your time on nonbusiness 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 nonbusiness activities to determine your deductible amount. See Travel allocation rules, below.
Exception. 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 purposes, 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, personal visiting, or other nonbusiness activity.
Example 2. If, in Example 1, you had no other 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 had a vacation or other nonbusiness activity between the United States and your business destination, or between your business destination and the United States, you must allocate your travel expenses between business and nonbusiness days. You determine your total allowable travel expenses as follows.
1.Divide the number of business days by the total number of travel days. 2.Multiply the result in (1) by the cost of round-trip travel between the United States and your nonbusiness destination. 3.Add to the result in (2) the round-trip cost of travel between the United States and your business destination minus the round-trip cost of travel between the United States and your nonbusiness destination. This is the deductible part of your cost of getting to and from your business destination. 4.Add to the result in (3) your business travel expenses (such as meals, lodging, and taxi fares) while at your business destination. These are your total allowable travel expenses.
Example. You live in New York and flew to Paris on May 4 to attend a conference with a customer that began on May 5. The conference ended at noon on May 8. That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew 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 8. You were outside the United States more than a week, and you are unable to show that you had no substantial control over arranging the trip or that a personal vacation was not a major consideration in making the trip. May 4 through May 8 (5 days) are business days and May 9 through May 21 (13 days) are nonbusiness days. You cannot deduct your expenses while in Dublin. You also cannot deduct 13/18 of the cost of round-trip airfare and any other expenses from New York to Dublin.
You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris. You figure the deductible part of your travel between the United States and Paris as follows:
1.5/18 of the round-trip airfare and other expenses between New York and Dublin, plus 2.The cost of the round-trip fare and any other expenses between New York and Paris minus the cost of the round-trip fare and any other expenses between New York and Dublin.
Assume the round-trip plane fare and other expenses between New York and Paris are $800 and the expenses between New York and Dublin are $600. Your deductible plane fare and other expenses are $366.67 [( 5/18 × $600) + ($800 - $600)].
Nonbusiness activity at or beyond business destination. If you had a vacation or other nonbusiness activity at or beyond your business destination, you must allocate your travel expenses between your business and nonbusiness days. None of your travel expenses for nonbusiness activities at or beyond your business destination are deductible. You must also allocate your round-trip travel costs between the United States and your business destination as follows.
Multiply the cost of your round-trip travel between the United States and your business destination by a fraction. The numerator (top number) is the number of business days. The denominator (bottom number) is the total number of travel days.
Add to this result your other business-related travel expenses (such as meals, lodging, and taxi fares) at your business destination. The sum is your total deductible travel expenses.
Example. Assume that the dates are the same as in the prior 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 13/18 of the airfare and other expenses from New York to Paris and back to New York. You can deduct 5/18 of the round-trip plane fare and other travel expenses from New York to Paris, plus your meals, lodging, and any other business expenses you had in Paris. If the round-trip plane fare and other travel expenses are $800 from New York to Paris, you can deduct travel costs of $222.22 ( 5/18 × $800).
Other methods. You can use another method of counting business days if you establish that it more clearly reflects the time spent on nonbusiness activities outside the United States.
Travel Primarily for Vacation
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. This is true even if you spend some time attending brief professional seminars or a continuing education program. You can, however, deduct your registration fees and any other expenses incurred that were 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 incurred by you 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 to ensure proper allocation of your deductible business expenses.
Luxury Water Travel
If you travel by ocean liner, cruise ship, or other form of luxury water transportation for the purpose of carrying on your trade or business, there is a limit on the amount you can deduct. You cannot deduct more than twice the federal per diem rate allowable at the time of your travel. For purposes of this limit, the federal per diem is the highest amount allowed as a daily allowance for living expenses to employees of the executive branch of the federal government while they are away from home but in the United States.
Daily limit on luxury water travel. The highest per diem amount allowed and the daily limit for luxury water travel in 1997 is shown in the following table.
Highest Daily Limit 1997Federalon Luxury Dates Per Diem
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Water Travel
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Jan. 1- Mar. 31$ 223$ 446 Apr. 1- Apr. 30 214 428 May 1- May 31 209 418 June 1- Oct. 31 221 442 Nov. 1- Dec. 31 223 446
Example. Caroline, a travel agent, took an ocean liner from New York to London, England, on business in May. Her expense for the 6-day cruise was $2,600. Caroline's deduction for the cruise cannot exceed $2,508 (6 days × $418 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 $2,600. 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 computes her deductible travel expenses as follows.
Meals and entertainment$1,60050% limit × .50Allowable meals & entertainment$ 800Other luxury water travel expenses + 1,000Allowable cost before the daily limit$1,800Daily limit for May 1997$418Times number of days × 6Maximum luxury water travel deduction $2,508Amount of allowable deduction $1,800Caroline's deduction for her cruise is limited to $1,800, even though the per diem rate 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.
Exceptions
The per diem rule does not apply to expenses you incurred to attend a convention, seminar, or meeting on board a cruise ship. See Cruise ships, under Conventions, next.
Conventions
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. Nonbusiness expenses, such as social or sightseeing expenses, are personal expenses and are not deductible.
Your appointment or election as a delegate does not, in itself, entitle you to or deprive you of a deduction. Your attendance must be connected to your own trade or business.
Convention agenda. The agenda of the convention does not have to deal specifically with your official duties or the responsibilities of your position or business. It is enough if the agenda is so related to your active trade or business and your responsibilities that attendance for a business purpose is justified.
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. Also, it must be 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:
American SamoaKingman ReefBaker IslandMarshall IslandsBarbadosMexicoBermudaMicronesiaCanadaMidway IslandsCosta RicaNorthern MarianaDominica IslandsDominican RepublicPalauGrenadaPalmyraGuamPuerto RicoGuyanaSaint LuciaHondurasTrinidad and TobagoHowland IslandUSAJamaicaU.S. Virgin IslandsJarvis IslandWake IslandJohnston Island
Reasonableness test. The following factors must be taken into account to determine if it was reasonable to hold the meeting outside the North American area:
1.The purpose of the meeting and the activities taking place at the meeting, 2.The purposes and activities of the sponsoring organizations or groups, 3.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, and 4.Other relevant factors you may present.
Cruise ships. You can deduct up to $2,000 per year of the expenses of attending conventions, seminars, or similar meetings held on cruise ships. You must, however, establish that the meeting is directly related to your trade or business. All ships that sail are considered cruise ships.
You can deduct these expenses if all of the following are true.
1.The cruise ship is a vessel registered in the United States. 2.All of the cruise ship's ports of call are located in the United States or in possessions of the United States. 3.You attach to your return a written statement signed by you that includes:
a.The total days of the trip, excluding the days of transportation to and from the cruise ship port, b.The number of hours each day that you devoted to scheduled business activities, and c.A program of the scheduled business activities of the meeting.
4.You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes:
a.A schedule of the business activities of each day of the meeting, and b.The number of hours you attended the scheduled business activities.