Tax Rules On Auto, Entertainment, And Travel

Primarily for Business

The taxpayer may deduct the entire travel cost as a business expense to and from the destination.

the taxpayer may deduct the cost of meals (up to 50%), lodging, and other business-related expenses while traveling.

Primarily for Personal

The traveling expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at such a destination.

Note Expenses while at the destination which are properly allocable to the taxpayer’s trade or business are deductible.

The amount of time.

As a general rule, a trip is primarily for business if bona fide business is conducted on over 50% of the trip days.

The factors depend on how much of the trip was business-related and on how much of the trip occurred within the United States.

It travels inside the United States from one point in the United States to another point in the United States.

It is calculated differently depending on the means of travel.

Public transportation.

By private car.

By private plane.

Business

Travel: deductible.

Lodging: Fully deductible on Business days.

Meals: Deductible on Business Days, Subject to 50% Limit.

Other Expenses (Personal): Nondeductible.

Other Expenses (Business): Deductible.

Personal

Travel: Nondeductible.

Lodging: Nondeductible (Except on business days).

Meals: Nondeductible (except on business days).

Other Expenses (Personal): Nondeductible.

Other Expenses (Business): Deductible.

The entire cost of the trip is a nondeductible personal expense, except for registration fees and any other expenses incurred that were directly related to their business.

The travel cost will have to be allocated between business and nonbusiness activities on a day-to-day basis.

Note: Not all of the travel cost from home to the business destination and return is deductible by an individual.

(Total Travel Expense * Nonbusiness Days)/ Total Days = Nondeductible Amount.

It is the expense that would have been incurred in traveling from the place where travel outside the United States away from home began to the personal destination and returning.

1. Divide the number of business days by the total number of travel days.
2. Multiply the result in (1) by the cost of round-trip travel between the United States and the nonbusiness destination.
3. Add to the result in (2) the round-trip cost of travel between the United States and the business destination minus the round-trip cost of travel between the United States and the nonbusiness destination. This is the deductible part of the taxpayer’s cost of getting to and from the business destination.
4. Add to the result in (3) the business travel expenses (such as meals, lodging, and taxi fares) while at the business destination. These are the total allowable travel expenses.

1. Multiply the cost of the round-trip travel between the United States and the business destination by a fraction. The numerator (top number) is the number of business days. The denominator (bottom number) is the total number of travel days.
2. Add to this result the other business-related travel expenses (such as meals, lodging, and taxi fares) at the business destination. The sum is the total deductible travel expenses.

• Foreign travel must be primarily for business (50% or more).
• And meet at least one of the requirements:

1. The taxpayer is an employee who is not related to his or her employer.
2. The trip lasts less than eight days (including the return travel day, but excluding the departure day).
3. Less than 25% of the total number of days outside the United States are nonbusiness days. This percentage calculation is done on a day-by-day basis and, for this purpose, both the day the trip began and the day it ended are counted.
4. The taxpayer had little control over arranging the business trip.
5. Personal vacation or holiday was not a major consideration in making the trip.

It depends on whether attendance primarily benefits or advances the taxpayer’s trade or business.

When it is primarily for political, social, or other purposes not directly related to the taxpayer’s trade or business.

It must be included in the taxpayer’s income.

• The amount of time devoted to business compared to recreational and social activities;
• If the location is related to the operation of the taxpayer’s trade or business;
• The attitude of the organization sponsoring the convention; and
• Whether attendance is mandatory.

It will not disallow the deduction.

1. Directly related to the taxpayer’s trade or business, and
2. It is as reasonable for the meeting to be held outside as within the North American area

• The purpose of the meeting and the activities taking place at the meeting,
• The purposes and activities of the sponsoring organizations or groups,
• The residences of the active members of the sponsoring organization,
• The places at which other meetings of the sponsoring organizations or groups have been held or will be held, and
• Such other relevant factors as the taxpayer may present.

(1) The 50 states of the United States and the District of Columbia;

(2) The possessions of the United States, which for this purpose are American Samoa, Baker Island, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, Guam, Howland Island, Jarvis Island, Johnston Island, Kingman Reef, the Midway Islands, Palmyra, the United States Virgin Islands, Wake Island, and other United States islands, cays, and reefs not part of any of the fifty states or the District of Columbia; 2-23

(3) Canada;

(4) Mexico;

(5) The Trust Territory of the Pacific Islands (that is, Palau);

(6) The Republic of the Marshall Islands; and

(7) The Federated States of Micronesia.

(1) Is a “beneficiary country”;

(2) Has entered into an agreement with the U.S. (bilateral or multilateral) for the exchange of tax information; and

(3) Has no tax laws discriminating against conventions held in the U.S.

A beneficiary country means Bermuda or any country designated by the proclamation of the President (pursuant to the Caribbean Basin Economic Recovery Act) as a beneficiary country.

(1) Transportation expenses to and from the place of the convention and meals while in travel status;

(2) Registration fees and other related expenses;

(3) Meals and lodging while away from home attending the convention; and

(4) Other incidental related travel expenses, such as taxi fares.

Up to $2,000 per individual per calendar year is deductible for directly related business conventions conducted on a cruise ship, provided:

(1) The ship is registered in the U.S., and (2) All ports of call of the cruise ship are located in the U.S. or U.S. possessions (§274(h)(2))

No deductions are allowed.

Any vessel sailing within or without the territorial waters of the U.S.

Note: All ships that sail are considered cruise ships.

1. A taxpayer’s statement, signed by the individual attending the meeting and including information with respect to: (a) The total days of the trip (excluding the days of transportation to and from the cruise ship port), (b) The number of hours of each day of the trip that the individual devoted to scheduled business activity, (c) The program of the scheduled business activity of the meeting, and (d) Such other information as may be required by the IRS.
2. A sponsor’s statement, signed by an officer of the sponsoring organization or group, includes:(a) A schedule of the business activity of each day of the meeting, (b) The number of hours during which the individual attending the meeting attended such scheduled business activities, and (c) Such other information as may be required by Regs. (§274(h)(5))

Section 274.

The amounts so stated are reduced by 50% prior to application of the per diem limitation (Notice 87-23).

No requirement to allocate.

(1) Expenses treated as compensation paid to an employee or otherwise included in the gross income of the recipient (§274(e)(2));

(2) Reimbursed expenses where the services are performed for an employer and the employer hasn’t treated the reimbursement as compensation (§274(e)(3));

(3) Expenses for recreational or social activities primarily for the benefit of employees (§274(e)(4));

(4) Services and facilities which are made available by the taxpayer to the general public (§274(e)(7));

(5) Services and facilities which are sold to customers (§274(e)(8)); and

(6) Expenses includable in the income of persons who are not employees (§274(e)(9)).

The individual is the taxpayer’s employee, has a bona fide business purpose for the travel, and would otherwise be allowed to deduct the travel expenses.

The corporation’s payment of the spouse’s expenses can be includable in the taxpayer’s gross income as compensation, or perhaps as a dividend.

Travel expenses.

Note: Deductible as travel expenses rather than medical expenses.

(1) The nature of the taxpayer’s work clearly requires that a particular expense be incurred to satisfactorily perform the work;

(2) The goods or services purchased by such expense are clearly not required or used, other than incidentally, in the conduct of the individual’s personal activities; and

(3) The Code and regulations are otherwise silent as to the treatment of such expense.