Incentive overseas business travel taxing situations revisited
(previously discussed in a client memorandum dated December 22, 1996)
U S Tax law treats incentive travel differently than nonincentive business travel, whether the travel is done inside or outside the United States. This is because an incentive trip is often taken purely for pleasure, even though the company who pays the travelers expenses has a business motive for doing so.
When a traveler takes a trip purely for pleasure, and someone else pays for that travel for business reasons, the payer can obtain a complete tax deduction under U S law for all costs associated with the trip, even for travel outside the United States. But the expenses must be "ordinary" (meaning commonly accepted in the payers business) and "necessary" (or helpful and appropriate, though not necessarily indispensable, in that business).
The trade-offs is that the payer must treat the fair market value of such travel as taxable income received by the traveler. And the payer must report that income to the traveler on Form 1099 (for non-employee expenses) or Form W-2 (for employee expenses) in order for the payer to receive a deduction.
By contrast, a person traveling purely for business may avoid being taxed on the value of the trip, even if someone else pays the expenses-and the payer may still claim at least a partial deduction for expenses paid. The trade-off here is that U S tax law includes many limitations on the tax deductions that may be claimed for expenses paid in connection with such travel, in addition to the "ordinary and necessary" expense requirement. For example: Non-travel-related business expenses directly connected with meetings held in foreign countries (such as registration fees) are deductible, provided that they meet the "ordinary and necessary" expenses requirement. But business travel deductions for attending meetings held in foreign countries (including meals and miscellaneous expenses) are not permitted at all, no matter who pays the expenses, unless one of two conditions applies. Either the meeting must be held within what is called the North American Area (which includes American Samoa, Baker Island, Barbados, Bermuda, Canada, Dominica, Dominican Republic, Grenada, Guam, Guyana, Honduras, Howland Island, Jamaica, Jarvis Island, Johnston Island, Kingman Reef, Marshall Islands, Mexico, Micronesia, Midway Islands, Northern Mariana Islands, Palau, Palmyra, Puerto Rico, Saint Lucia, Trinidad and Tobago, United States of American, U S Virgin Islands and Wake Island) or it must be just as reasonable to hold the meeting outside the North American Area as in it.
To deduct travel expenses related to attendance at meetings held outside these countries, there must be some reason for holding the meeting outside this area other than the attractive nature of the locale. Reasons may relate to the purpose or activities of the meeting, the purpose and activities of the sponsoring organization, where attendees live, and where other meetings of the sponsoring entity have been held or will be held. If a multinational corporation or association, the "reasonableness" of a meeting being held outside the North American Area hold a meeting will probably be easy to establish. But for other business meetings, the availability of deductions for expenses can be seriously restricted.
Other restrictions on business travel expenses deductions apply to travel outside the United States, whether the purpose of the travel is to attend a business meeting or some other business purpose. (Again, they do not apply to incentive travel and other situations where the value of travel is taxed to the traveler). These restrictions include:
1) No deductions available for business travel expenses if the travel is primarily for the travels pleasure and only incidentally for business purposes. If a traveler spends some time, for example, attending a short conference or seminar that is business-related, but spends the lengthier portion of the trip on vacation, no travel expenses will be deductible, no matter who pays them. Only ordinary and necessary non-travel-related business expenses (such as registration fees) are deductible.
2) If travel is primarily for business (from the travelers point of view), deductions may not be taken for that portion of travel expenses equal to the percentage of nonbusiness days in the trip. Business days include those required for reasonable direct travel to and from business destinations, days when travelers presence is required at a particular place for a specific business purposes, days when travels principal activity during his normal working hours is business, and days when the traveler is prevented from scheduled work by circumstances beyond his control (such as weather and weekends)
3) If travel is entirely for business, or if travel meets certain other requirements so that it will be considered entirely for business under U S tax law, all travel expenses are eligible for deduction, provided that meet other tests discussed in this issue. Travel is considered to be entirely for business if: a) the traveler is required to take a trip by his employer (to whom the traveler is not related); b) the traveler is outside the U S for no more than a week (not counting the day of departure, but counting the day of return to the U S); c) less than 25 percent of the travelers time outside the U S is spent on personal activities (counting both departure and return days as time outside the U S); or d) the traveler can establish that a personal vacation is not a "major consideration" in taking the trip.
4) A traveler cannot deduct expenses that he pays to have another person (spouse, child or whomever) travel with him, unless that other person a) is the travelers employee, client, customer, business associate or business consultant; b) has a bona fide business purpose for the travel; and c) would be able to deduct his own expenses, under the rules discussed in this issue, if the other person paid those expenses.
Deductions for meals and entertainment in connection with business travel are available only for "ordinary and necessary" expenses that are not "lavish or extravagant" and meet one of the following tests:
Directly Related Test: 1) the meals or entertainment take place in a clear business setting or 2) the main purpose of the expense is the active conduct of business, or 3) the traveler engages in business during the meal or entertainment period, and 4) there is more than a general expectation of getting a specific business benefit from the expenditure.
b) Associated Test: 1) the meals or entertainment are associated with the
Travelers trade or business; and 2) the meals or entertainment directly
Precedes or follow a substantial business discussion.
Because tax laws are complex and often change, readers are encouraged to consult their own tax advisors in addition to reading the information in these pages. Please contact our office or your tax advisor for advice on how the material discussed apply to their specific situations. The information presented is intended to inform, alert and prompt further discussions to the reader of the presented tax and other accounting items of interest, but since it is presented in abbreviated form and not all-inclusive, it should be implemented only upon in-depth consultation with your appropriable advisors. Also contact referenced venders for additional specific information and application.
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