Travel expenses: By land, sea or air
Andrew Seifert, JD, tax consultant, Wipfli LLP | October 2018 Footnote
Are you traveling to California for work and want to bring your spouse? Do you need to spend one night in a neighboring state for work-related reasons? Or, are you being rewarded with a trip for exceeding expectations at work? Then you need to understand how the Tax Cuts and Jobs Act (TCJA) has and hasn't changed travel expense rules.
Whether your business takes you to Munich, Dubai or Fargo, this article walks you through the various forms of business travel and the related tax consequences.
Tax reform and moving expenses
Although there were no sweeping changes to travel deductions, it should be noted the TCJA has suspended the deduction for moving expenses.1 While not directly related to business travel, the suspension of this deduction is an important change for employers who are contemplating relocating employees. Employers considering relocating employees should consider the tax burden employees will now face, as any payment or reimbursement for moving expenses will be included in the employee's income.
Additionally, the TCJA has suspended all miscellaneous itemized deductions that are subject to the 2 percent of adjusted gross income floor under IRC Section 67, including unreimbursed employee travel expenses.2 Because this deduction is gone, employers traditionally reliant upon unreimbursed employee travel expenses to provide a tax benefit should consider redefining their travel expense policies. If new expense policies are not adopted, employees will be stuck paying for their business expenses but will not get a deduction; whereas, if the new policies provide that an employer either reimburses the employee or pays the expenses directly, the employer can take a deduction for the very same expenses the employee is no longer able to take.
Now that the unreimbursed employee travel expenses deduction is suspended, it's incumbent to understand what to do for businesses or self-employed taxpayers taking deductions for travel expenses by either reimbursing employee expenses or paying for the expenses directly.
Normal business travel
The boss told me to pack up my stuff. I'm heading to Des Moines for the week.
A taxpayer is allowed a deduction for travel costs, which are not lavish or extravagant, while away from home in the pursuit of a trade or business.3 Before taxpayers can start tallying their travel costs, they must determine whether they are away from home. Whether taxpayers are away from home depends on where their tax home is.
Generally, a tax home is the taxpayer's regular place of business, employment, station or post of duty, regardless of where their family home is located.4 The taxpayer's tax home includes the entire city or general area in which the business or work is located.5
Further, the term "away from home" means the trip must require sleep or rest for the taxpayer.6 According to the Tax Court, sleep or rest must require sufficient enough time to necessitate lodging.7 However, the taxpayer does not need to be gone for an entire 24 hours to have the trip qualify as away from home, so long as the trip is long enough to need sleep or rest from the duties of the job.8
Finally, the taxpayer must determine whether the assignment is temporary or indefinite. Your tax home does not change if your job away from home is temporary.9 However, if your assignment lasts more than one year, it is deemed to be indefinite and your travel expenses are not deductible.10
My bags are packed and I'm heading to Las Vegas for a convention!
Taxpayer expenses for attending a convention or other meeting may constitute an ordinary and necessary business expense if incurred in connection with the performances of his or her services as an employee.11 Additionally, the primary purpose of attending the convention must be for deriving a business benefit.
The fact that an employee uses vacation or leave time, or that attendance at the convention is voluntary, does not disallow the deduction.12 However, if the convention is for political, social or other purposes unrelated to the taxpayer's trade or business, the expenses are not deductible.13
Business and pleasure
I am headed to San Francisco for work. Do you want to come with?
Often, a business trip involves some personal component. The distinction between business and personal is regularly muddied to justify the travel deductions related to the trip. To clarify the distinction between business and personal travel, the regulations provide that if the trip is "related primarily" to trade or business, the travel expenses incurred to and from the location are deductible.14 However, if the trip is primarily personal in nature, the travel expenses to and from the location are not deductible.15
Whether a trip is primarily related to business or personal depends largely on facts and circumstances of each case, including the amount of time devoted to each category.16Regardless of whether the primary purpose of the trip is business or personal, once at the location, expenses related to business are deductible and any personal expenses are not deductible.17
In the case of a taxpayer traveling outside the U.S., if the travel exceeds one week, the taxpayer is required to calculate the amount of time spent on nonbusiness activities and reduce the travel expenses to and from the location accordingly.18
Generally, there is no deduction allowed for travel expenses incurred with respect to a spouse, dependent or other individual accompanying the taxpayer on business travel. Any reimbursement for so-called spousal travel is taxable. The exception to this general rule applies if the spouse, dependent or other individual is an employee of the taxpayer; the travel of the spouse, dependent or other individual is for a bona fide business purpose; and, such expenses would otherwise be deductible by the spouse, dependent or other individual.19
I had the most sales this quarter, so the company is paying for a vacation to Miami!
If a taxable prize is paid in goods or services, including a trip, the prize is valued and taxed at its fair market value.20 The fair market value of the goods or services must be included in the recipient's gross income.21 Since it is often the intent of the employer to treat these awards as an incentive for performance, many organizations will choose to "gross up" the award by contributing additional money to offset the tax liability.
However, if the employer is unwilling to gross up the award, and the taxpayer has no desire to retain the award, the taxpayer can decline to accept the award and avoid any danger of triggering a corresponding tax liability.22
Ciao! I am here for the convention.
In the case of a taxpayer who attends a convention that is held outside of the North American area, no deduction is allowed for the expenses of the meeting unless the taxpayer establishes that the meeting is directly related to the active conduct of his trade or business, and that it is reasonable that the meeting be held outside of the North American area.23 The reasonableness test considers such factors as the purpose and activities of the meeting, the purpose and activities of the sponsoring organization, the residences of the organization's active members and the locations of their other meetings, and other relevant factors that the taxpayer may present.24
The North American area is defined as the United States, its possessions and the Trust Territory of the Pacific Islands, and Canada and Mexico.25
Ahoy, where is the next port-of-call?
Expenses incurred for meetings held aboard cruise ships are subject to several restrictions to qualify for a deduction. For travel expenses to be covered aboard a cruise ship, the taxpayer must show:
- The meeting is directly related to the active conduct of their trade or business.
- The ship is a U.S. registered vessel.
- All the ship's ports-of-call are within the U.S., its possessions or Puerto Rico.
- The applicable reporting requirements are satisfied.
The reporting requirements must be attached to the taxpayer's tax return who is claiming the deduction and they must include a written statement containing:
- The total days of the trip, excluding transportation to and from the ship port, and the total number of hours devoted to business activities.
- A program of scheduled business activities of the meeting.
- A written statement by an officer of the sponsoring group that includes a schedule of the business activities, and the number of hours that the individual attended meetings for business activities.27
If an individual meets all these requirements, the taxpayer is restricted to a $2,000 deduction for all cruises taken by that individual within each calendar year.28 Unfortunately for cruisers, many cruise ships are not U.S. registered vessels, so the deduction would not be available.
Move ahead intelligently
While there were no sweeping changes to travel deductions, it is important to be reminded of the basic tax consequences of work travel. Whether you have been asked to travel near or far, strictly for business or trying to tie in some pleasure, any resulting tax should not come as a surprise to the employee or the employer.
Andrew Seifert, JD is a tax consultant for Wipfli LLP, where he assists clients with complex tax issues, transactional advising and overall business consulting. In addition, Andrew frequently presents on tax-related matters. He may be reached at email@example.com or 651-766-2856.
1 Public Law 115-97, Section 11049.
2 Public Law 115-97, Section 11045.
3 IRC Section 162(a)(2).
4 IRS Pub No. 463, pg. 3 (2017).
6 US v. Correll, 389 US 299 (1967).
7 Strohmaier v. Commissioner, 113 TC 106 (1999).
8 IRS Pub. No. 463 pg. 3 (2017).
9 Rev. Rul. 93-86, 1993-2 CB 71.
10 IRC Section 162(a)
11 Rev. Rul. 60-16, 1960-1 CB 58.
12 Treas. Reg. 1.162-2(d).
13 Treas. Reg. Section 1.162-2(d).
14 Treas. Reg. Section 1.162-2(b)(1).
16 Treas. Reg. Section 1.162-2(b)(2).
18 IRC Section 274(c).
19 IRC Section 274(m)(3).
20 Treas. Reg. Section 1.74-1(a)(2).
21 Treas. Reg. Section 1.74-1(a)(1).
22 Rev. Rul. 57-374, 1957-2 CB 69.
23 IRC Section 274(h)(1).
24 IRC Sections 274(h)(1)(A)-(B).
25 IRC Section 274(h)(3)(A).
26 IRC Section 274(h)(2).
27 IRC Section 274(h)(5).
28 IRC Section 274(h)(2).