TRAVEL EXPENSES

By Richard Greenfield, CPA,
Reminick, Aarons & Company, LLP

Deductible travel expenses are ordinary and necessary expenses incurred while you are away from home on business. The expenses are not deductible if they are lavish or extravagant. (Note: Neither the regulations nor the legislative history defines lavish or extravagant.) You are considered to be traveling away from home if your job requires you to be away from the general area of your tax home substantially longer than a normal day's work and you need to rest or sleep to meet the requirements of your work while you are away. Your tax home is generally your regular place of business; it doesn't matter where you maintain your personal residence. It includes the entire city or general area in which your business is located. If you have more than one regular place of business, your tax home is your main place of business. If you have no main place of business, your tax home is located where you regularly live. (Note: Certain itinerants are never away from home in the tax sense--their tax home is wherever they work.)

In order for travel expenses to be deductible, the assignment cannot be expected to last more than one year. Assignments in excess of one year are considered to be indefinite, in which case the travel expenses are not deductible. If an assignment is expected to last one year or less, but subsequently lasts more than one year, the assignment will be considered to be temporary until it is known that it will last longer. Travel expenses incurred during the period prior to notification will still be deductible. If an assignment is expected to last more than one year, but subsequently lasts one year or less, travel expenses will not be deductible because at the beginning of the assignment it was expected to last longer.

Example 1: An employee who normally lives and works in New York City is sent to Chicago for a job assignment expected to last 11 months. The assignment lasted 11 months as scheduled. The assignment is considered to be temporary since it was expected to last and actually lasted one year or less. Travel expenses are deductible.

Example 2: The facts are the same except that after 10 months the employee is informed that the assignment will last an additional 6 months. Travel expenses for the first 10 months would be deductible because the employee reasonably expected the assignment to last one year or less during that period of time. Travel expenses incurred after the employee was informed of the extension of the assignment are not deductible.

Example 3: The facts are the same as in example 1, except the assignment was scheduled to last 15 months, but actually lasted only 9 months. Travel expenses are not deductible because the assignment was originally expected to last more than one year.

An employee on indefinite assignment must include in income any amounts received from the employer for living expenses, even if they are under an "accountable plan."

Deductible travel expenses include transportation fares; taxi, commuter bus, and limousine fares; baggage and shipping costs; car expenses; lodging; meals; cleaning and laundry; and telephone. The cost of leasing a car is deductible if used for business purposes while traveling away from home. Only 50% of unreimbursed meal expenses are deductible. You may choose to deduct the actual costs of operating your car or you can use the standard mileage rate of 31 cents per mile for 1996. A standard per day meal allowance is also available to most business travelers. Employees that are related to their employers cannot use the standard meal allowance.

If another individual, such as your spouse or dependent, accompanies you on your business trip, you generally cannot deduct his or her travel expenses unless that person is your employee, has a bona fide business purpose for the trip, and would otherwise be allowed to deduct the expenses.

If the purpose of a particular trip is entirely for business activities, all of the travel expenses are deductible. If part of the trip was for pleasure, different rules apply depending on whether the trip was within or without the U.S. When travel within the U.S. is primarily for business, all of the expenses of getting to and from the location are deductible. If the purpose of the trip was primarily for pleasure, none of the travel expenses are deductible. However, expenses which are incurred in connection with business activities at the location are deductible. If travel outside the U.S. is primarily for business purposes, but you spent 25% or more of the time on nonbusiness activities, travel expenses generally must be allocated between business and nonbusiness activities to determine the amount deductible. The allocation is usually based on the number of days spent on business and nonbusiness activities (the day-to-day method). Travel outside the U.S. will be considered entirely for business even if you spend a portion of your time on non-business activities if you meet any one of the following four conditions:

1. You did not have substantial control over arranging a trip.

2. You were outside the U.S. for one week or less.

3. You were outside the U.S. for more than a week, but spent less than 25% of the time on nonbusiness activities.

4. You can prove that a personal vacation was not a major consideration, even if you have substantial control over arranging the trip.

As with domestic travel, if travel outside the U.S. is primarily for nonbusiness purposes, the entire cost of the trip is not deductible. Any expenses incurred directly in connection with business activities on the trip are deductible.

Travel expenses incurred to attend a convention are deductible if you can prove that your attendance benefits your trade or business. Travel expenses incurred to attend a convention or seminar outside the North American area are deductible only if the meeting is directly related to your trade or business. It must also be as reasonable to hold the meeting outside the North American area as in it.

An employee's unreimbursed travel expenses are generally deductible as a miscellaneous itemized deduction subject to the two percent of adjusted gross income reduction. If an employee is reimbursed by his or her employer under an accountable expense reimbursement plan, no amount needs to be reported by the employee. If the reimbursements are made under a nonaccountable plan, they must be reported as wages on the employee's Form W-2; the expenses may be deducted by the employee as a miscellaneous itemized deduction.

A self-employed individual incurring deductible travel expenses in an unincorporated business would deduct the expenses on Schedule C.

Nonbusiness travel expenses may be deductible if incurred for charitable, medical, or educational purposes. Travel expenses incurred in connection with performing services for a charitable organization are deductible as a charitable contribution provided that the primary motive for the expense is to benefit the charity. Travel expenses incurred for medical purposes are deductible as medical expenses if the travel is primarily for the treatment of a specific medical condition and not for general health benefits. The cost of lodging while away from home to receive medical treatment can be deducted up to $50 per night if the medical care is provided by a physician in a licensed hospital or equivalent outpatient facility and there is no significant element of personal pleasure, recreation, or vacation in travel. Travel expenses incurred in connection with getting an education are deductible if the purpose of the trip is primarily to obtain that education and if the cost of the education itself is deductible. In other words, the purpose of the education must be to maintain or improve skills required by the taxpayer's employer or trade or business, if self-employed. However, travel that in itself is a form of education is not deductible.

To deduct travel expenses a taxpayer must substantiate the amount, time, and place and the business
purpose. For travel expenses incurred after September 30, 1995, documentary evidence isn't required if
the amount is under $75 (up from $25). *

Editor:
Edwin B. Morris, CPA
Rosenberg, Neuwirth & Kuchner

Contributing Editors:
Richard M. Barth. CPA

John J. Kearney, CPA
Israeloff Trattner & Co., CPAs P.C.

Franklin H. Federmann, CPA
Own Account