This is an area of tax law that seems to confuse a lot of taxpayers. And, let’s face it, a lot of taxpayers do a fair amount of traveling related to their business. The rules aren’t really that difficult. In this article (and the next) we will explore them together.
We’d better define the term “travel” before continuing. We are talking about business travel when you are “away from home” spending the night out-of-town.
For our discussion, we will divide “travel” expenses into 2 categories: “getting there and back” and “while you are there”. The rules are going to be really easy to learn if we keep these two categories separate. This week, we’ll look at the first category. We’ll finish next week with the second category.
“Getting there and back”……Tax Rule: All or Nothing
The IRS says that if the primary purpose of the trip was for business, then all of the expenses in “getting there and back” are fully deductible. If not, none of the “getting there and back” expenses are deductible. This is a good, simple rule. Let’s illustrate it with a few examples.
You flew out to Florida and went to a trade show related to your business. It started on Friday and ended on Sunday. Your flight arrived Thursday evening and you flew back late Sunday afternoon. You did NOT do any sightseeing (relax….that’s coming!). Assume you flew out of the Eugene airport and drove your car up there (left it at the airport lot).
So, what expenses did you incur in “getting there and back”? The correct answer is the airfare, mileage in driving your vehicle to and from Eugene, and the fee for parking your car at the Eugene airport. The next issue is can you deduct those expenses? As stated above, if the primary purpose of the trip was business, then those expenses are fully deductible. I think we can all agree that, in this case, the primary purpose was business.
Now let’s get a bit crazy and see what happens. Let’s say your spouse joins you on this trip (and he/she is not a part of the business) and you drive to Florida instead of flying. Well, this certainly changes things, right? First of all, since the primary purpose of the trip is still business, the “all or nothing” rule applies. However, your spouse cannot say that his/her primary purpose for the trip was business. Therefore, your “getting there and back” expenses are fully deductible, but your spouse’s are not. By the way, what are those expenses? They are the mileage, hotels (you had to stay somewhere, right?) and food on the way out.
There’s a problem here. We just said that your spouse’s expenses for “getting there and back” are NOT deductible. So, do we only get to deduct 50% of the mileage, hotels and food? I was actually involved in an audit where the IRS agent tried to disallow 50% of these expenses for a taxpayer who had the very situation described above. The correct answer is that we can deduct ALL of the mileage (after all, how many extra miles did you have to drive just because your spouse came along?), all of the hotel bills (it doesn’t cost any more money to get a room with a queen size bed) and all of your food costs, but not your spouse’s food. That makes sense, right?
Now for the twist you’ve all been waiting for. It turns out that this trade show is in Orlando, Florida, and you have every intention of visiting Disneyworld while there. You spend 5 extra days after the trade show to do that. Remember, there are two completely different things going on here. You will be incurring “getting there and back” expenses (whether you fly or drive) and then you will be incurring “while you are there” expenses (these will be covered next week because the rules are different). So, the only issue we need to deal with right now is the “getting there and back” expenses. Can we deduct them? Remember, it’s all or nothing. If the primary purpose is business, then ALL of these expenses are deductible. If not, then NONE of them are deductible.
Here’s the question I ask my clients to determine whether they meet the “primary purpose” test. I ask “would you have gone to Disney World if there was no trade show there?” If their answer is NO, then it is obvious to me that they meet the test and ALL of the “getting there and back” expenses are deductible.
Now, can the IRS ever challenge this? Of course they can. However, that’s why it is important to document these things early on so your tax position can be adequately defended. A little planning goes a long way!
In part 2, we’ll look at the different rules for the “while you are there” expenses.