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Mapping Out Deductions for Foreign Business Travel

In this ever-shrinking business world, it's not unusual for business owners and executives to establish key relationships with suppliers and vendors in foreign countries. So you may be spending more time globe-trotting and less time tending to matters at home.

Practical advice: Whenever possible, try to schedule business trips to produce the maximum tax benefits. In some cases, a minor change in the itinerary can provide a major boost to your tax deductions.

Let's go back to the start. The tax rules for deducting foreign business travel are generally the same as the rules for domestic travel. In other words, a taxpayer can deduct business-related travel expenses, such as lodging and 50% of the cost of meals, while traveling away from home on business. You can also write off the full cost of airfare as long as the primary purpose of the trip is business-related.

On the other hand, special limits exist if you spend part of the trip abroad on personal pursuits. The airfare is completely deductible only if you meet at least one of these four tests:

1. You do not have substantial control over arranging the trip. For this purpose, an employee is considered to have “substantial control” if he or she has authority over comings and goings or owns 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 arranging the trip).
3. You are away from the United States for one week or less.
4. If the trip lasts longer than one week, you spend less than 25% of the time on nonbusiness matters.

If none of these tests are met, you must allocate your transportation expenses between the business portion and the nonbusiness portion of the trip, based on the ratio of business to personal days. The best way to ensure a full deduction for travel lasting longer than a week is to keep the nonbusiness portion of the trip within the 25% limit.

What happens if you travel across the border in a vehicle? In that case, you must allocate costs between travel occurring within the U.S. and travel outside it. For example, if an owner or employee takes a business trip to Montreal or Mexico City, the limits discussed above apply. Finally, if it's at all possible, try to maximize expenses inside the U.S.

Caution: The IRS tends to closely scrutinize business travel deductions. Make sure you keep detailed records to back up your claims.

 

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