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Deducting Business Travel Expenses – Tax Home

A Necessary Place to Call (Tax) Home

Lots of folks travel for business.  That may be a necessary evil but it’s expensive, too, and the companies that send them need to take full advantage of the tax deductions available.  Nice hotels, warm and sunny locales, pricey dinners out with drinks and giant desserts.  Maybe the traveler wants to take his sweetheart, stay an extra day or two, squeeze in a round of golf.

Businesses get to deduct from income the “ordinary and necessary” expenses of carrying on their trades and businesses.  So the question is:  what exactly can the business deduct when its employees go on walkabouts?

The answer depends first on whether the travel is actually “away from home”.  So for these purposes, where is home?  For such a familiar, everyday notion it is fraught with more than its share of complexity and tax traps for the unwary.  For example, is “home” where you live or where you work, where you file your state taxes or where you always intend to return someday and build that little house on the prairie?

A state trying to tax your earnings might say home is where you live, where your kids go to school, where your house is and your car is registered and where you vote.  But the IRS – looking at your travel deductions on audit – will say “tax home is where you work”.  If you work out of several offices it’s the one where you spend the most time.

More particularly, tax home is the general area surrounding your main place of business, for example, the metropolitan area where your main office is located.  How far does the penumbra extend?  Well, if you haven’t gone so far that you have to sleep awhile before returning then you haven’t gone far enough.  This is called the “overnight rule”.

So imagine a bright young executive living in Boston who gets the call early one morning ordering him to head for New York City and close the Penske deal.  Dutifully, he buys a first class plane ticket, lands at LaGuardia before 10:00 a.m., and by lunchtime the contracts are signed, sealed, and delivered.  Celebrating and exhausted the executive dines well, stays in a posh hotel, gets a massage, takes in a play, and is back in his Boston office the following morning.

Clearly, our young friend’s travel took him away from his Boston tax home and so this was absolutely “travel away from home”.  He even stayed overnight.  But is that enough to satisfy the overnight rule?  Maybe not.

Remember, the object here is to allow businesses to offset their income for the “ordinary and necessary” costs of generating that income.  Our executive could have flown back after lunch.  His presence wasn’t required in New York City after lunch.  Viewed this way, the airfare (but was first class really necessary?), cabs to and from the airport, lunch all qualify for deduction.  But the hotel and massage, the play, breakfast the next morning?

It seems unlikely, doesn’t it, that Uncle Sam will see those costs as the sort of necessary and ordinary business expenses incurred in earning the income subject to tax.

It’s possible, of course,  that if challenged, a different sort of case for deduction could be made.  Perhaps the New York mini-vacation was in the nature of a bonus, a perk, a reward for a job well done.  Maybe there was some possibility that the young executive’s presence in New York that evening or the next morning might have been required on a moment’s notice.  Perhaps the stress had been eating away his mental health and it was good business to help a good employee.  Who knows what favorable facts might be brought to bear?

A good tax attorney, one who understands all the possibilities, would have the best chance of bringing about a favorable resolution.

 


This article is for informational purposes only and does not constitute legal advice.  You should consult a qualified attorney before taking any action.