Plan Overseas Trips
With Tax
Savings in
Mind |
If you travel a lot on business,
you may make some international trips — as well as trips
within the United States. When traveling abroad, you may want
to add a few extra days to a trip for relaxing and
sightseeing. Keep in
mind that the tax rules for foreign business travel are
different from those for domestic travel.
Whenever you
spend any time vacationing on a foreign business trip, the
general rule says you must allocate all your travel
expenses –- including transportation costs — between business
and personal days.
The good news: With a
little advance planning, you can take advantage of two
loopholes and deduct all of your foreign transportation
expenses despite what the general rule says.
Here's
what you need to know to plan ahead.
Take Advantage of the “One-Week Rule.” As
long as your business trip lasts one week or less, you can
automatically deduct 100 percent of transportation costs
(including plane fare and cabs to and from airports). This is
true even when you actually spend most of your time
vacationing. Solely for purposes of figuring out if you
qualify for the one-week loophole, don’t count the day
you leave. But do count the day you return.
Of course, you can also deduct out-of-pocket daily living
expenses (including hotels, cabs, tips and 50 percent of
meals) for all business days while you're out of the
country. Of course, you cannot deduct your daily living costs
for vacation days.
Fortunately, the definition of a business day is pretty
liberal. For example:
Travel days count.
Weekends and holidays falling between
business days count.
You can include intervening weekdays between
business days.
You can also count any standby days
when your presence is physically required for business
reasons — whether or not you are actually called upon to
work on those days.
Finally, you're allowed to count days you
intend to work but can’t for reasons beyond your
control (for example, transportation difficulties caused by
weather or a terrorist incident).
As you can see, these guidelines are rather
taxpayer-friendly. But keep in mind that the main
reason for your trip must still be for business.
Otherwise, none of your transportation costs are
deductible.
Take Advantage of the “25-Percent Rule.”
Obviously, some foreign business trips last more than a
week. No problem. Just plan ahead to take advantage of another
loophole — the 25-percent rule. If you qualify, you can once
again deduct 100 percent of your transportation costs and all
your daily out-of-pocket living expenses for business days
(subject to the 50 percent limitation on meals).
The trick here to make sure you spend less than 25
percent of your total days vacationing. For this purpose, you
can count the day of departure and the day of return as
business days. You can also count all the other types of
business days listed earlier. In many cases, it’s easy to meet
the 25-percent rule.
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Partial write-offs are still allowed
when loopholes don’t apply. Some
business travelers are able to take advantage of one of
the two loopholes by carefully planning foreign business
travel. If you are not able to plan a trip that
qualifies, you still get some deductions.
As long as the primary reason for your trip is
business, you can always deduct the business
percentage of your transportation costs under the
general allocation rule for foreign travel. To figure
the percentage, simply divide the days spent principally
on business by the total number spent outside the
country, including travel days. (Travel time counts,
along with all the other types of days covered earlier.)
As always, you can write off your out-of-pocket daily
living expenses for the business days (subject to the 50
percent rule for meals). The general foreign travel
allocation rule doesn’t apply to the cost of
transportation for legs of trips that begin and end on
U.S. soil. For example, let's say you are jetting
from New York to Tokyo. The main purpose for your trip
is two days of business meetings. However, your
arrangement doesn’t qualify for either the one-week rule
or the 25-percent rule. You have to change planes in Los
Angeles both ways. You can deduct 100 percent of the
cost of the outbound leg from New York to L.A. and 100
percent of the leg from L.A. back to the Big Apple. The
general foreign travel allocation rule applies to the
remainder of your airfare (the legs from L.A. to Tokyo
and back to L.A.). Once again, the trip must be
primarily for business in order for any of your
airfare to be deductible.
When you mix vacation with
business, it’s critical to carefully document the number
of business days and the amount of out-of-pocket
expenses allocable to those days. Log all your
business activities and the time spent in your daily
planner. Make a copy for your tax file. That way, you’ll
be protected in the event of an IRS audit.
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