Business Trips That Mix Business With Pleasure

Many taxpayers are beginning to plan trips that combine elements of both business and pleasure. Business trips, conventions, and continuing education seminars are frequently planned to incorporate exotic locations and leisure time. With proper planning, these trips can generate some legitimate deductions.

Taxpayers who travel away from their tax home on business are permitted to deduct travel expenses, including fares, meals, lodging, and incidental expenses, if they are not otherwise "lavish or extravagant". A taxpayer's tax home is his regular or principal place of business, or his residence if he has no regular or principal place of business. Naturally, you are not prohibited from enjoying non-business or personal activities while on a business trip, but the primary reason for the trip must be related to your trade or business.

Foreign travel expenses are subject to some limitations that are not applicable if the business trip is within the United States. Some of an individual's foreign travel expenses may not be deductible if he or she takes part in substantial non-business activity during the trip. Taxpayers who travel outside the U.S. for longer than one week or spend less than 75 percent of their time on business are subject to allocation rules, which operate to partially disallow their expenses. The general rule is to allocate expenses, including meals and lodging, between business and non-business on a day-to-day basis. Each day is either entirely for business, or it is considered to be a non-business day. A day counts as entirely for business if the taxpayer's principal activity on such day was the pursuit of a trade or business.

Expenses for both self-employed persons and employees to attend a convention in the U.S. may be deductible if there is a sufficient relationship to the taxpayer's trade or business. However, a special rule prohibits the deduction of any costs of attending conventions or seminars for personal investment purposes.

Cruise ships. A limited deduction (to a maximum of $2,000 annually) is permitted for conventions on cruise ships if the ship is of U.S. registry (most cruise ships are not registered in the U.S.), all ports of call are in the U.S. or its possessions, and the meeting is directly related to the taxpayer's trade or business. Rigorous reporting requirements must be satisfied, including written statements by both the attendee and an officer of the sponsoring organization.

Foreign conventions. A foreign convention under the tax law is considered one held outside the U.S., its possessions, the Trust Territory of the Pacific Islands, Canada, or Mexico. The deductibility of expenses for foreign conventions is subject to a higher standard than for conventions held in the U.S. The taxpayer must establish that the meeting is directly related to the active conduct of his trade or business and that it is as reasonable to be held outside the North American area as within it.

For a stateside convention, the taxpayer merely has to show that his business duties and responsibilities are related to the agenda of the meeting even though it may not deal with the specific duties of the taxpayer's work.

If you have any questions about how the travel rules would apply to any business trip that you anticipate taking soon, please contact us.