Tax Ramifications of Business Travel Expenses

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For some companies, business travel is a thing of the past, as business executives increasingly conduct meetings via Skype and other Web-based conference options. But for others, travel still is a significant part of the way they do business. If you’re among the latter group, or even if business travel is merely occasional rather than a way of life for you and your employees, it’s good to be aware of how travel expenses are taxed.

What’s the plan?

Generally, for federal tax purposes, a company may deduct all ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business. This includes travel expenses that aren’t deemed lavish or extravagant.

For employees, business travel expenses funded by their employers are typically considered “working condition fringe benefits” and, therefore, not included in gross income. This exclusion generally applies to property and services you provide to an employee so that the employee can perform his or her job.

Under the Internal Revenue Code, an advance or reimbursement for travel expenses made to an employee under an “accountable plan” is deductible by the employer and not subject to FICA and income tax withholding. In general, an advance or reimbursement is treated as made under an accountable plan if an employee receives the advance or reimbursement for a deductible business expense paid or incurred while performing services for his or her employer. The employee also must account for the expense to his employer within a reasonable period of time and in an adequate manner, and return any excess reimbursement or allowance within a reasonable period of time.

By contrast, an advance or reimbursement made under a “nonaccountable plan” isn’t considered a working condition fringe benefit — it’s treated as compensation. Thus, the amount is fully taxable to the employee, and subject to FICA and income tax withholding for the employer.

What’s the status?

Although business transportation — going from one place to another without an overnight stay — is deductible, attaining “business travel status” fully opens the door to substantial tax benefits. Under business travel status, the entire cost of lodging and incidental expenses, and 50% of meal expenses, is generally deductible by the employer that pays the bill. What’s more, those amounts don’t equate to any taxable income for employees who, as mentioned, are reimbursed under an accountable plan.

So how does a business trip qualify for business travel status? It must involve overnight travel, an employee traveling away from his or her tax home, and a temporary trip undertaken solely, or primarily, for ordinary and necessary business reasons.

Bear in mind that “overnight” travel doesn’t necessarily mean an employee must be away from dusk till dawn. Any trip that’s long enough to require sleep or rest to enable the taxpayer to continue working is considered “overnight.”

Further, under final regulations, there’s an exception under which local, “nonlavish” lodging expenses incurred while not away from home overnight on business may be deductible if all facts and circumstances so indicate. One factor specified in the regs is whether the employee incurs the expense because of a bona fide employment condition or requirement.

What are the rules?

For most companies, the issue of employee travel still arises — even if it doesn’t come up as often as it did in the past. To ensure your business and employees are protected from adverse tax outcomes related to travel expenses, you need to be aware of the rules. Consulting a tax professional can help you stay on top of the latest developments in this area.

Need Additional Information?

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