The Tax Ramifications of Business Travel Expenses

For some companies, business travel is a thing of the past, as business executives increasingly conduct meetings via Skype and other Web-based conference options. But for others, travel still is a significant part of the way they do business. If you’re among the latter group, or even if business travel is merely occasional rather than a way of life for you and your employees, it’s good to be aware of how travel expenses are taxed.

What’s the plan?

Generally, for federal tax purposes, a company may deduct all ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business. This includes travel expenses that aren’t deemed lavish or extravagant.

For employees, business travel expenses funded by their employers are typically considered “working condition fringe benefits” and, therefore, not included in gross income. This exclusion generally applies to property and services you provide to an employee so that the employee can perform his or her job.

Under the Internal Revenue Code, an advance or reimbursement for travel expenses made to an employee under an “accountable plan” is deductible by the employer and not subject to FICA and income tax withholding. In general, an advance or reimbursement is treated as made under an accountable plan if an employee receives the advance or reimbursement for a deductible business expense paid or incurred while performing services for his or her employer. The employee also must account for the expense to his employer within a reasonable period of time and in an adequate manner, and return any excess reimbursement or allowance within a reasonable period of time.

By contrast, an advance or reimbursement made under a “nonaccountable plan” isn’t considered a working condition fringe benefit — it’s treated as compensation. Thus, the amount is fully taxable to the employee, and subject to FICA and income tax withholding for the employer.

What’s the status?

Although business transportation — going from one place to another without an overnight stay — is deductible, attaining “business travel status” fully opens the door to substantial tax benefits. Under business travel status, the entire cost of lodging and incidental expenses, and 50% of meal expenses, is generally deductible by the employer that pays the bill. What’s more, those amounts don’t equate to any taxable income for employees who, as mentioned, are reimbursed under an accountable plan.

So how does a business trip qualify for business travel status? It must involve overnight travel, an employee traveling away from his or her tax home, and a temporary trip undertaken solely, or primarily, for ordinary and necessary business reasons.

Bear in mind that “overnight” travel doesn’t necessarily mean an employee must be away from dusk till dawn. Any trip that’s long enough to require sleep or rest to enable the taxpayer to continue working is considered “overnight.”

Further, under final regulations, there’s an exception under which local, “nonlavish” lodging expenses incurred while not away from home overnight on business may be deductible if all facts and circumstances so indicate. One factor specified in the regs is whether the employee incurs the expense because of a bona fide employment condition or requirement.

What are the rules?

For most companies, the issue of employee travel still arises — even if it doesn’t come up as often as it did in the past. To ensure your business and employees are protected from adverse tax outcomes related to travel expenses, you need to be aware of the rules. Consulting a tax professional can help you stay on top of the latest developments in this area.  

Sidebar: Where is your tax home?

One particular aspect of business travel taxability that many companies struggle with is the concept of a “tax home.” In a nutshell, the IRS allows deductions for meals and lodging on business trips because these expenses are duplicative of costs normally incurred at employees’ homes and require them to spend more money while traveling. Consequently, a taxpayer can’t claim deductions for meals and lodging unless he or she has a home for tax purposes and travels away from it overnight.

A “tax home” — that is, an employee’s home for purposes of the business-travel deduction rules — is located at either his or her regular or principal (if more than one regular) place of business, or regular place of abode in a real and substantial sense, if he or she has no regular or principal place of business.

If an employee has two or more work locations, his or her “main” place of work will be considered the tax home. In determining which location is the main place of work, the IRS looks at factors such as total time spent at, degree of business activity in, and amount of income derived from, each business location.

There may be situations, however, in which an employee has no permanent residence. For example, an itinerant salesperson who moves from place to place is only “home” wherever he or she stays at each location. Because the taxpayer doesn’t have duplicative expenses, there’s likely no deduction for meals and lodging.

This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.