How to (properly) deduct international business travel
I’ll be attending the Not the Typical Psychotherapist Summit in Nashville, TN in a few short weeks. After so many virtual conferences over the last few years, I’m ready to go to all the in-person events! Ernesto Segismundo, the event organizer recently announced that the 2023 summit would be in London, England. Woohoo!
That got me thinking… I’ll bet lots of therapists are wondering if international travel can be tax deductible and how to plan for it. So I condensed the relevant sections of IRS Publication 463 in this blog post for you and added my commentary.
If reading through tax law is a little too dry for you, feel free to listen to the podcast episode on the same topic at www.therapyforyourmoney.com.
This article doesn’t address all nuances related to international business travel. As always, when in doubt it’s a good idea to consult with your tax professional to make sure you are on the same page and if you’d like clarification.
DEDUCTING INTERNATIONAL BUSINESS TRAVEL
Trip Primarily for Personal Reasons
If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. However, you can deduct any expenses you have while at your destination that are directly related to your business. A trip to a resort or on a cruise ship may be a vacation even if the promoter advertises that it is primarily for business. The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, won’t change what is really a vacation into a business trip.
Travel Outside the United States
If any part of your business travel is outside the United States, some of your deductions for the cost of getting to and from your destination may be limited. For this purpose, the United States includes the 50 states and the District of Columbia. How much of your travel expenses you can deduct depends in part upon how much of your trip outside the United States was business related.
How much of your travel expenses you can deduct depends in part upon how much of your trip outside the United States was business related.
Julie’s note: If you are traveling with a spouse, significant other or family members keep in mind that their travel expenses will not be deductible - unless they work in your business and have a business reason for joining you on the trip (I know, I know, moral support doesn’t count!). That doesn’t mean they shouldn’t join you, but it DOES mean you should be careful about what you deduct. Make sure to mention it to your accountant or bookkeeper so they know what’s what.
Travel Entirely for Business or Considered Entirely for Business
You can deduct all your travel expenses of getting to and from your business destination if your trip is entirely for business or considered entirely for business.
Travel entirely for business. If you travel outside the United States and you spend the entire time on business activities, you can deduct all of your travel expenses.
Travel considered entirely for business. Even if you didn’t spend your entire time on business activities, your trip is considered entirely for business if you meet at least one of the following four exceptions.
Exception 1—No substantial control.
Exception 2—Outside United States no more than a week.
Exception 3—Less than 25% of time on personal activities.
Exception 4—Vacation not a major consideration.
Exception 1—No substantial control. Your trip is considered entirely for business if you didn’t have substantial control over arranging the trip. The fact that you control the timing of your trip doesn’t, by itself, mean that you have substantial control over arranging your trip.
You don’t have substantial control over your trip if you:
• Are an employee who was reimbursed or paid a travel expense allowance, and
• Aren’t related to your employer, or
• Aren’t a managing executive.
Julie’s note: Business owners won’t qualify for this exception since you have substantial control over business travel.
Exception 2—Outside United States no more than a week. Your trip is considered entirely for business if you were outside the United States for a week or less, combining business and nonbusiness activities. One week means 7 consecutive days. In counting the days, don’t count the day you leave the United States, but do count the day you return to the United States.
Example. You traveled to Brussels primarily for business. You left Denver on Tuesday and flew to New York. On Wednesday, you flew from New York to Brussels, arriving the next morning. On Thursday and Friday, you had business discussions, and from Saturday until Tuesday, you were sightseeing. You flew back to New York, arriving Wednesday afternoon. On Thursday, you flew back to Denver.
Although you were away from your home in Denver for more than a week, you weren’t outside the United States for more than a week. This is because the day you depart doesn’t count as a day outside the United States.
You can deduct your cost of the round-trip flight between Denver and Brussels. You can also deduct the cost of your stay in Brussels for Thursday and Friday while you conducted business. However, you can’t deduct the cost of your stay in Brussels from Saturday through Tuesday because those days were spent on nonbusiness activities.
Julie’s note: This is a great way to deduct 100% of your international airfare!
Exception 3—Less than 25% of time on personal activities. Your trip is considered entirely for business if:
• You were outside the United States for more than a week, and
• You spent less than 25% of the total time you were outside the United States on nonbusiness activities.
For this purpose, count both the day your trip began and the day it ended.
Example. You flew from Seattle to Tokyo, where you spent 14 days on business and 5 days on personal matters. You then flew back to Seattle. You spent 1 day flying in each direction.
Because only 5/21 (less than 25%) of your total time abroad was for nonbusiness activities, you can deduct as travel expenses what it would have cost you to make the trip if you hadn’t engaged in any nonbusiness activity. The amount you can deduct is the cost of the round-trip plane fare and 16 days of non-entertainment-related meals (subject to the 50% Limit), lodging, and other related expenses.
Exception 4—Vacation not a major consideration. Your trip is considered entirely for business if you can establish that a personal vacation wasn’t a major consideration, even if you have substantial control over arranging the trip.
Travel Primarily for Business
If you travel outside the United States primarily for business but spend some of your time on other activities, you generally can’t deduct all of your travel expenses. You can only deduct the business portion of your cost of getting to and from your destination. You must allocate the costs between your business and other activities to determine your deductible amount. See Travel allocation rules, later.
Tip: You don’t have to allocate your travel expenses if you meet one of the four exceptions listed earlier under Travel considered entirely for business. In those cases, you can deduct the total cost of getting to and from your destination.
Travel allocation rules. If your trip outside the United States was primarily for business, you must allocate your travel time on a day-to-day basis between business days and nonbusiness days. The days you depart from and return to the United States are both counted as days outside the United States.
To figure the deductible amount of your round-trip travel expenses, use the following fraction. The numerator (top number) is the total number of business days outside the United States. The denominator (bottom number) is the total number of business and nonbusiness days of travel.
Counting business days.
Your business days include transportation days, days your presence was required, days you spent on business, and certain weekends and holidays.
Transportation day. Count as a business day any day you spend traveling to or from a business destination. However, if because of a nonbusiness activity you don’t travel by a direct route, your business days are the days it would take you to travel a reasonably direct route to your business destination. Extra days for side trips or nonbusiness activities can’t be counted as business days.
Presence required. Count as a business day any day your presence is required at a particular place for a specific business purpose. Count it as a business day even if you spend most of the day on nonbusiness activities. Day spent on business. If your principal activity during working hours is the pursuit of your trade or business, count the day as a business day. Also, count as a business day any day you are prevented from working because of circumstances beyond your control.
Certain weekends and holidays. Count weekends, holidays, and other necessary standby days as business days if they fall between business days. But if they follow your business meetings or activity and you remain at your business destination for nonbusiness or personal reasons, don’t count them as business days.
Julie’s note: The sandwich rule means that if you have business meetings on Friday and Monday, then Saturday and Sunday are considered business days. If your meetings end on Friday and you stay on your destination until Monday, Saturday and Sunday are nonbusiness days.
Reasonableness test. The following factors are taken into account to determine if it was as reasonable to hold the meeting outside the North American area as within the North American area.
•The purpose of the meeting and the activities taking place at the meeting.
•The purposes and activities of the sponsoring organizations or groups.
•The homes of the active members of the sponsoring organizations and the places at which other meetings of the sponsoring organizations or groups have been or will be held.
•Other relevant factors you may present.
Julie’s note: If you are mixing business and personal travel, you’ll want to keep detailed records of which days are business and nonbusiness. Only deduct the business related travel and keep your records in case you are ever audited.
BUDGETING FOR INTERNATIONAL BUSINESS TRAVEL
There are conferences at every price point, so if you feel like cash is way too tight for an expensive event it’s okay to pass for this year. The answer doesn’t have to be No, it can be Not right now.
If you think you can swing it, it can be a good idea to budget for a larger expense like this one. The good news is that since international events take more planning, time is on your side.
The two biggest expenses will be flight and lodging, followed by meals, activities and local transportation. That can add up quickly!
You typically won’t be able to book your flight until +- 330 days prior to your flight date, but one thing you can do now is make sure your passport is current. Start your budget by taking a look at how much flights are 1 year from today. The rates may change for your specific travel date, but it will at least give you a cost estimate. Plan to have this amount saved one year before the event so you have the funds to book your flight whenever you find a good deal.
Then, consider the preferred room rate offered for conference attendees. In many cases you won’t need to pay this until you get to the hotel, although some venues will ask that you prepay the room or pay a deposit. Set aside funds each month to cover the expense.
Last, give yourself a budget for everything else! Remember to consider currency exchange rates.
I’m a huge fan of Profit First, and having a separate bank account for your travel expenses can be an easy way to meet your travel savings goal. Having a big goal can be really motivating and keep your Profit First efforts going strong.
This article is designed to provide information only and should not be considered legal or tax advice. Because of the complexity of the law and the variables in your own personal tax situation, you can’t rely on our advice specifically related to your unique circumstances. In order to get the best tax savings and legal advice available to you, you should consult with your own accountant, attorney or advisor regarding your particular facts and circumstances. GreenOak Accounting is an accounting firm that specializes in working with counselors and therapists in private practice. We provide monthly accounting & bookkeeping services, tax services and online courses. For more information on our specialized services for therapists please visit www.greenoakaccounting.com