Figuring out what the IRS will allow as a reasonable business travel expense can be hard, especially when it comes to foreign travel.
One of my previous articles outlined how to deduct travel expenses when you combine personal excursions (or activities) with business travel. Basically, the business trip must be primarily for business in order to claim the entire trip as a business expense. The deciding factor is usually the amount of time (not expenses) spent on business activities vs. time spent on personal activities. If more time is devoted to business, the entire trip qualifies as a deductible business trip. And of course, if you engage in no substantial personal activities, your entire business trip is fully deductible.
Foreign Travel Deductions
For foreign travel, not only do you have to satisfy the business time requirement above, but you will have to satisfy additional hurdles IF:
1) Your total foreign travel days are more than 7 consecutive days
2) Your foreign travel "non-business days" are 25% or more of your total foreign travel days.
Here's how this all works
On Monday, you fly from Boston to London, and attend all-day business conventions and meetings through Thursday. From Friday to Sunday, you're sightseeing in London. You return to Boston on Monday. The majority of time spent on business activities exceeds the amount of time spent on personal activities, so you satisfy the General "time" rule for all business-and-personal travel. So far, you qualify for a 100% business trip. Now apply the foreign rules; since your "total foreign travel" days are not more than 7 days, no special foreign rules apply, and you keep your fully deductible business trip.
Now if you had worked through Friday extended your personal weekend through Monday, leaving Tuesday, you still meet the time-requirement general rule, but your foreign travel days exceeded 7 consecutive AND your "personal days" (3 days – Saturday, Sunday, Monday) are greater than 25% of your total foreign travel days (total foreign travel days Monday through the following Tuesday = 8 days, and 25% of 8 = 2. So 3 personal days exceeds 2). Therefore, you must reduce your business trip deduction by 3/8ths (personal days/total foreign days).
Now, deep within the Tax Code there lies a couple of exceptions to this foreign-travel rule: first, if you can show that you are either not in control of the business travel (not deciding if the travel is necessary) OR that the main motivation of the trip was not personal (sound business reasons for the trip), then you avoid the foreign travel rule, and you’re back to a fully deductible business trip. Another way to avoid the foreign travel rule is by utilizing the IRS method of defining "business days."
For example, days between "business days" (weekends, holidays or even other weekdays) become "business days," themselves. So in our example, if you had another business meeting on Tuesday and departed on Wednesday, then all of your "foreign days" become "business days" because Saturday, Sunday and Monday fell between two clearly "business days," and the travel day returning home is also business. Therefore, you have no "personal days." Since your personal days (0) now do not exceed 25% of your total foreign travel days, special foreign travel rules don't apply.
Your back to a fully deductible business trip, assuming the Time-spent rule discussed in my previous article is satisfied (in this example, it would be since the time spent on business activities – 7 days, Monday through Friday and the following Tuesday and Wednesday, exceeded the time spent on personal activities -3 days, Saturday, Sunday and Monday).
Now if, after your Tuesday meeting, you stay in London for 2 more days enjoying the culture, returning on Friday, first apply the general Time rule: 7 business days (M-F, Tues, Fri) vs. 5 personal days (Sat,Sun, Mon, Wed, Thur). The general rule for time-spent on business vs. personal activities is met, so your trip is fully deductible so far. Now the foreign travel rules have to be reviewed; your total foreign travel days exceed 7 consecutive days, but you only have 2 personal days under the foreign rules (only the last Wednesday and Thursday now, since Saturday, Sunday and Monday were between other "business days") which is less than 25% of the now total 12 days foreign travel.
Therefore, the foreign travel rules do not apply. You’re back to a fully deductible business trip.
As you can see, there would be a certain advantage to having your business/convention meetings spread out every few days, turning "personal days" into "business days." Some legitimate business reasons why your meetings/conventions may be spread out include: to allow time for brainstorming on specific business strategies, scheduling conflicts with key employees necessitated various meetings, preparation was required between successive meetings, clients visited were only available certain days, convention and other business meeting dates did not coincide, etc…whatever the business reason happens to be for intermittently scheduled business events.
Also in applying the foreign travel rules, partial business days, according to the IRS, qualify for complete business days," so a two-hour business meeting in the morning followed by personal activities the rest of the day, is a "business day."
Optimizing Your Potential Deductions
Obviously, the more foreign travel days you can legitimately classify as "business days," the better chance you have at avoiding the effect of the special foreign travel rules.
If you’re self employed, you can obviously use this information to your advantage.
But what about the company employee who’s reimbursed for travel expenses? Consider this: Based on our discussions of the travel rules above, you determine your trip is a fully deductible business trip. Now while you are in London, your company reimburses you for Meals at the rate of $65 a day. You turn in expense reports for any out-of-pocket expenses. Even though your company reimburses you, or simply pays you, for meals at $65 a day, you can still deduct the difference between the IRS Per Diem Meal amount for London ($144 a day), and what you got reimbursed for each day you’re away.
If your company reimburses you for Lodging at $175 a day, the IRS Per Diem Lodging for London is now $319. That’s right, the difference is tax deductible. The same is true for out-of-pocket expenses. Over the course of a year, this difference can add up.
So when you mix personal activities with business travel, review the above discussions to determine, first, whether the majority of time is spent on business activities (the general "time" rule) and, if foreign travel is involved whether you can avoid the foreign travel rules as outlined above. If not, reduce your business travel deductions by the appropriate ratio of "non-business days" to "total days spent abroad."