A taxpayer's expenses incurred due to travel outside of the United States for business activities are deductible, but under a stricter set of rules than domestic travel. Foreign travel expenses may be subject to special allocation rules if a taxpayer engages in personal activities while traveling on business. Expenses subject to allocation include travel fares, meals, lodging, and other expenses incident to travel.
Allocation expenses
Frequently, international business trips have a personal aspect. A taxpayer who travels outside of the United States for both business and pleasure may deduct no part of his or her travel expenses (airfare, cabs, hotel, meals, etc.) if the trip is not primarily related to business. However, business expenses incurred while at the destination are deductible even though the travel expenses are not.
If the trip is primarily related to business, then that portion of travel properly allocated to the business portion may be deducted. Proper allocation is based on the amount of time spent on each activity. "Primary purpose" is a purpose of more than 50 percent. Foreign travel for purposes of allocation is travel outside the 50 states and the District of Columbia.
Important exceptions
The general "primary purpose" rule on foreign business travel, fortunately, has two huge exceptions, one for anyone who travels a week or less and the other for most employees on business trips under an expenses allowance arrangement.
The allocation rules do not apply to taxpayers:
- who do not have substantial control over the business trip;
- whose travel outside the United States is a week or less in duration;
- who establish that a personal vacation was not a major factor in deciding to take the trip; and
- whose personal activities conducted during the trip are less than 25 percent of the total travel time.
Taxpayers who travel under reimbursement or other expense allowance arrangements are not considered to have substantial control over the business trip unless they are the managing executive of the employer or a party related to, or more than 10 percent owner of the employer.
Conventions
Business conventions come under a separate rule. A taxpayer cannot deduct travel expenses for attending a convention, seminar or similar business meeting held outside the "North American area" unless specific criteria are satisfied. The "North American area" includes not only the US, Canada, and Mexico but also Costa Rica, Honduras and many islands in the Atlantic, Caribbean, and the Pacific.
If you are unsure of how to allocate your business travel expenses and need additional information, please give our office a call. We would be glad to help.
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