TJT Certified Public Accountants

Deducting Foreign Business Travel

As the world shrinks, business owners may find themselves traveling to foreign destinations. Often, such trips are vital, leading to personal visits with suppliers and potential customers. Ideally, you’ll be able to deduct all your travel costs, but that may not be the case if you venture beyond the 50 states and Washington, D.C.

 The seven-day rule

If you travel outside the U.S. for a week or less, your trip will be considered entirely for business, even if you combine business and nonbusiness activities. Then, you can deduct all of your travel costs. A week, for this purpose, is seven consecutive days, not counting the day you leave the U.S. Example 1: Denise Edwards has a clothing import business in Chicago. She travels to San Francisco on Tuesday, then flies to Hong Kong on Wednesday. After spending Thursday and Friday in business discussions, Denise spends Saturday through Tuesday sightseeing. She flies back to San Francisco on Wednesday and returns to Chicago on Thursday. Here, Denise was not outside the U.S. for more than a week. (The day she departed from San Francisco does not count as a day outside the U. S.) Therefore, she can deduct all of her travel costs. She also can deduct the cost of her stay in Hong Kong for the days she worked there but not her costs for her sightseeing days.

 More than one week

Business trips longer than one week trigger another set of rules. As long as 75% or more of the trip’s total days are business days, you can deduct all your travel costs. Days traveling to and from your destination count as business days, for the purpose of reaching the 75% mark. Again, your costs for nonbusiness days are not tax deductible. If your trip is primarily for business, but you fail both the one week and the 75% tests for the travel, calculating your deduction becomes more complicated. You can only deduct the business portion of your cost of getting to and from your destination and must allocate your travel time on a day-to-day basis between business days and nonbusiness days. Example 2: Henry Jackson owns a restaurant supply business in Boston. He flies to Berlin on March 7 for a conference and spends time there on business until March 17. That day, Henry flies to Brussels to see friends and tour the local museums. On March 24, he returns to Boston from Brussels. As the IRS looks at Henry’s itinerary, it appears that Henry could have returned to Boston on March 17, after completing his business. Thus, 11 days of the trip (March 7–17) count as business days while the other seven days (March 18–24) are nonbusiness days. With this reasoning, 7 out of 18 days of the trip were nonbusiness days, so 7/18 of what it would have cost him to travel roundtrip between Boston and Brussels is not tax deductible. Assume Henry’s total airfare costs were $2,000, whereas roundtrip airfare between Boston and Brussels would have been $1,500. Henry must subtract 7/18 of this roundtrip fare ($1,500 x 7/18= $583) from his actual travel expenses. Because Henry spent $2,000, subtracting $583 gives him a $1,417 deduction for his airfare. He can deduct his costs while in Berlin on business but not his costs while in Brussels for other purposes. As you can see, calculating foreign business travel deductions can be complex. If you will be outside the United States for business, our office can help you set up a schedule for optimal tax benefits.