International Business Travel – The Ins and Outs of Tax Deductions

International travel for business might seem glamorous and exciting from the outside, but often it is the same as any other business trip except there are more time zones and a passport involved. Still, there are important record-keeping tasks to consider no matter how far you travel.

For any part of the trip to qualify as deductible, the expense must be ordinary and necessary. In other words, the presumption is you could not have accomplished this work from your regular work location.

Here are the major categories that qualify as deductions:

• Transportation,
• shipping and luggage costs,
• communications costs,
• laundry bills,
• lodging, and
• meals.

Transportation
According to the IRS, you can deduct the full cost of your transportation to and from the country if your trip was entirely for business purposes or considered entirely for business purposes.

The key word in the preceding sentence is the word ‘considered.’ Even if a trip includes activities that are not entirely business related, the expenses may be deductible if at least one of the following exceptions apply:

• You don’t have substantial control (i.e., are not a managing executive, not related to your employer, and not receiving a travel expense allowance).
• You aren’t outside the United States more than one week.
• You were outside the United States for more than a week but spent less than 25% of the time away on non-business activities.
• Vacation wasn’t a major consideration.

The IRS rules are quite specific about how much of the trip might be deductible if you combine a leisure trip with a business trip. The following examples demonstrate what is and is not deductible.

Combining Business and Personal, With and Without an Accompanying Spouse
In this first example, you are an employee at your place of business. You flew from Chicago to Tokyo, where you spent 14 days on business and 5 days on personal matters. You then flew back to Chicago. You spent 1 day flying in each direction. The total length of your trip was 21 days.

Since less than 25% (5 days out of 21 days = 23.8%) of your total time abroad was for nonbusiness activities, you may deduct the cost of the round-trip plane fare and 16 days of non-entertainment-related meals (subject to the 50% limit), lodging, and other related expenses as business-related travel expenses.

In the second example, you are still an employee at your place of business, but you bring your spouse along on the trip. Your spouse is not an employee.

None of the expenses related to your spouse are deductible. For the entire 21-day trip, your spouse’s airfare, food, and entertainment are not deductible.

What if your spouse is an employee? What happens if you own your own business and your spouse is a part-owner?

That’s where it gets complicated. According to Jim Hamilton, Weiss partner and CPA who leads the firm’s tax planning and compliance department, “If your spouse is an employee of the company, or a part owner, it may be possible to deduct his or her travel-related expenses, but everything must be substantiated.”

Other Travel Deductions—and One Category Not Allowed
The transportation category includes how you got to and from the airports, both in the United States and the destination country. Expenses related to renting a car, paying for gasoline, or taking taxis or car services at your destination are legitimate travel deductions. Make sure to save all your receipts.

However, if you received a free ticket or are traveling for free using a mileage program (or other similar program), the deduction amount is zero.

Shipping and Luggage
If you need to ship materials over to your destination or pack them in your luggage and pay for extra baggage, those are deductible expenses.

Communication
International cell phone charges or renting a temporary phone to conduct business within your destination country are legitimate business expenses.

Laundry
If you need to pay for necessary laundry or dry-cleaning expenses to conduct your business within your destination country, those costs are allowable as business deductions.

Lodging
The hotel you stay at within your destination country is a deductible expense. Unlike meal expenses, there is no daily limit on hotel charges.

Incidental expenses such as tips to porters and hotel staff are deductible and generally limited to $5 per day.

Food
Deductions for food, beverage, and related tipping expenses are capped at 50%. Meals that are “lavish or extravagant” are not deductible, but “an expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances,” according to the IRS.

Deductions may be based on the actual cost or the standard meal allowance. “If you use the standard meal allowance, you must still keep records to prove the time, place, and business purpose of your travel,” advises the IRS.

As always, this summary is a guide. If you have any questions about the information here or what is on the IRS website, contact your Weiss tax advisor.