It’s a global economy. Even small business operations have established relationships with clients and vendors in foreign countries. So you may find yourself globe-trotting on behalf of your company.
Alert: It’s important to learn the tax “ins and outs” for foreign business travel.
Here’s the whole story: The basic rules for deducting foreign travel expenses are somewhat similar to the tax rules for travel within the U.S. borders. Within the United States, you can deduct business-related travel expenses, such as lodging and 50% of the cost of your meal for business days, and you can write off the full cost of your air fare as long as the primary purpose of the trip is for business.
However, there are special limits for deducting foreign travel expenses if you spend part of the trip on personal pursuits. Your roundtrip air fare is completely deductible only if you meet at least one of these four tests:
1. You don’t have substantial control over arranging the trip abroad. If you’re an employee, you are considered to have “substantial control” if you have authority over your travel or you own 10% or more of the company.
2. You can prove that taking a vacation was not a major consideration for making the trip (even if you have substantial control over the travel).
3. You are away from the United States for one week or less.
4. You spend less than 25% of your time on nonbusiness matters for a trip lasting longer than one week.
If you don’t meet one of these four tests, you must allocate your transportation expenses between the business portion and the nonbusiness portion of your trip abroad (based on the ratio of business days to total days). The best way to ensure a bigger deduction for travel lasting longer than a week is to stay within the 25% limit.
Example: 3 ways to expand deductions
Let’s say you’re a small business owner and you’re taking a 10-day business trip to London to meet with new suppliers. Currently, you plan on spending seven days on business matters and three days sightseeing. The roundtrip air fare is $1,500.
At this point, only a portion of your air fare is deductible because you don’t meet any one of the four tests above. So your transportation deduction is limited to $1,050 (seven business days out of 10 total days x $1,500). The other $450 is nondeductible. You can also deduct your lodging expenses and 50% of your meals for the business days.
Strategy 1: By changing your plans slightly, you can deduct 100% of your air fare. For example, if you spend just one less day sightseeing, the $1,500 is deductible. In that case, you will have spent less than 25% of your time on nonbusiness matters (two days out of a total of nine days).
If a business trip lasts a week or less, the day of departure doesn’t count as a business day, but the day you return home does. For a business trip lasting more than a week, both days count as business days.
Strategy 2: By leaving home at night and coming back in the morning, you effectively add two business days onto your trip (now a 12-day trip). If you spend just one more day abroad on business, making it a 13-day trip, you will be spending less than 25% of your time on nonbusiness activities (three days out of 13 total days).
Note: If your plane makes a stop on U.S. soil, the portion of the trip within the United States isn’t subject to the allocation rule, so you can deduct 100% of that part of the transportation cost as long as the primary purpose of the trip is business.
Strategy 3: When you book your flight, arrange to have a stopover within the United States close to your foreign destination. Then allocate the cost of the trip based on mileage. You can deduct 100% of the cost of travel within the United States and a percentage of the remainder, based on the rules discussed above.
Online resource: For more information go to www.irs.gov/publications/p463/ch01.html.
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