Business-related foreign travel expenses are tax deductible. However, because of the potential for abuse (e.g., sneaking in a Paris vacation under the guise of a business trip), these expenses are scrutinized closely by the IRS.
Good documentation is an absolute must. If you travel outside the U.S. purely for business purposes, all your travel expenses of getting to and from your business destination are deductible. However, if you spend part of your time in a foreign country engaging in personal activities, you may have to allocate your travel expenses and only deduct the amounts allocated to business.
You must allocate the expenses between deductible business expenses and non-deductible personal expenses in proportion to the number of days you spent on nonbusiness activities during your trip, unless you meet one of the certain conditions.
Foreign travel solely for business is fully deductible. Foreign travel expenses are fully deductible if you spent 100 percent of your time abroad on business. However, if you engaged in any non-business activity, whether sightseeing or visiting old friend, you may have to make an allocation between deductible business expenses and non-deductible personal ones.
Time spent for personal purposes may trigger allocation. If you spend part of your time in a foreign country engaging in personal activities, you may have to allocate your travel expenses in proportion to the number of days you spent on nonbusiness activities during your trip, unless you meet one of the following conditions:
- Less than one week outside the US. You were outside the U.S. for a week or less, combining business and personal activities (a week is seven consecutive days - not counting the day you leave the U.S., but counting the day you return to the U.S.).
- Less than 25 percent of time on personal activities.You were outside the U.S. for more than a week, but you spent less than 25 percent of the total time you were in a foreign country on personal activities (counting both the day your trip began and the day it ended).
- Vacation was not a consideration. You can establish that a personal vacation was not a major consideration.
If you meet one or more of these conditions, your trip is considered to be entirely for business. This means you can deduct all of your business-related travel expenses.
Allocation Required When Personal Time Exceeds 25 Percent
If you don't meet at least one of the conditions set forth above and you spent 25 percent or more of your time on personal activities, you'll have to allocate your travel expenses of getting to and from your destination between your business and personal activities to determine your deductible amount. You must allocate your expenses for foreign travel even if your trip was primarily for business reasons.
Vacations are never deductible. However, if your trip was primarily for vacation purposes, the entire cost of the trip is a nondeductible personal expense. However, if you do conduct incidental business, you can can deduct expenses that you incurred on the trip that were directly related to your business.
Convention Expenses May Be Deductible
You can deduct your travel expenses (including travel, lodging, and meals for yourself) when you attend a convention within the United States if you can show that attending the convention benefits your business. These rules apply to workshops, conferences and seminars, as well as actual conventions.
You can satisfy the business relationship test by showing that your business duties and responsibilities tie in to the program or agenda of the convention. The agenda doesn't necessarily have to deal specifically with your duties or responsibilities - a tie-in is enough. You must, however, show some kind of income-producing purpose for attending the convention. In any case, you won't be able to deduct any nonbusiness expenses (sightseeing, for example) you incur while attending the convention.
Caroline, an interior designer, attends the Window Covering Association of America trade show in Kentucky. She returned with renewed enthusiasm for her profession and with knowledge regarding several new vendors. Caroline can deduct her expenses because attending the show benefits her business.
The rules become far stricter when the convention is held outside North America or on a cruise ship. Basically, the IRS doesn't want people deducting their vacations. However, they recognize that at least some of these trips are for bona fide business purposes. Here's what you need to know:
Conventions held outside North America. In order to be able to deduct expenses for attending a convention outside the North American area, the convention must be directly related to your business and it must be as reasonable to hold the convention outside North America as in it. For example, it would be reasonable to hold the convention outside North America if many of the convention's attendees lived overseas. You must also satisfy the requirements for deducting business travel expenses outside the U.S..
However, there is a way to enjoy an exotic locale without triggering the foreign convention rules: be aware of what countries are considered within the "North American area." For purposes of convention travel, a North American area" includes the obvious: the United States, its possessions, the Trust Territory of the Pacific Islands, Canada and Mexico. However, it also includes countries that have an information agreement in place with the United States and that might certain tax law requirements.
The IRS maintains a list of these countries, many of which are tourist meccas that you might not think of as North American. They include:
|Antigua and Barbuda ||Aruba ||Bahamas |
|Barbados ||Bermuda ||Costa Rica |
|Dominica ||Dominican Republic ||Grenada |
|Guyana ||Honduras ||Jamaica |
|Marshall Islands, Republic of ||Micronesia, Federated States ||Netherlands Antilles |
|Palau, Republic of ||Panama ||Trinidad and Tobago |
Conventions held on cruise ships. The following requirements must be met before you can deduct expenses incurred for a convention or seminar held on a cruise ship:
- The convention must be directly related to the active conduct of your business.
- The cruise ship must be a vessel registered in the U.S.
- All of the cruise ship's ports of call must be located in the U.S.(or its possessions).
- You must attach to your income tax return a written statement signed by you that includes the total days of the trip (excluding the days you spent traveling to and from the ship's port), the number of hours each day that you devoted to scheduled business activities, and a program of the scheduled business activities of the meeting.
- You must attach to your income tax return a written statement signed by an officer of the organization or group sponsoring the convention that includes a schedule of the business activities of each day of the convention, and the number of hours you attended the scheduled business activities.
If you meet the requirements, you can deduct up to $2,000 annually of the expense of attending a seminar or convention on a cruise ship. In the case of a joint return, a maximum of $4,000 would be deductible if each spouse attended qualifying cruise ship conventions.