Dear Clients and Friends:

There are several tax-free perks when mixing business with pleasure on an away-from-home business trip.

Because of how the business-travel rules and accountable-plan requirements work, an employee who makes an employment-related out-of-town business trip can qualify for a travel bargain by piggybacking a vacation onto the business trip. In effect, the employee gets free vacation airfare if the trip is set up properly. Here's how the rules work for domestic travel, along with a look at other business travel reimbursement strategies that may yield personal savings.

Free airfare for a vacation trip piggybacked onto a business trip: Under the regulations covering deductions for business travel, a taxpayer who mixes a bit of pleasure with business while away from home may deduct all of the round-trip transportation costs as long as the trip was undertaken primarily for business reasons. The cost of lodging plus 50% of meals while on business status is also deductible. Under the accountable plan regulations, a reimbursement made to an employee is income- and payroll-tax-free if (1) the reimbursed expense is allowable as a deduction and is paid or incurred in connection with performing services as an employee of the employer, (2) each reimbursed expense is adequately accounted for (i.e., substantiated) to the employer within a reasonable period of time, and (3) any amounts in excess of expenses are returned within a reasonable period of time.

These rules make it possible for an employee to be reimbursed tax-free for the airfare for a personal vacation, if that vacation is tacked on to a trip undertaken primarily for business.

Illustration: The CFO of a corporation flies from his Chicago home base to Arizona for a 5-day business trip. He takes in three days of golf after the business part of the trip is over. The corporation reimburses him for the airfare and the business portion of the trip after he submits detailed records and receipts. He pays for the personal portion of the trip (meals and lodging during the three golfing days). Result: Under the accountable plan rules, the reimbursement for the round-trip airfare (as well as for meals and lodging while on business status) is tax-free to the CFO. That's true even though he took a mini-vacation after his business trip ended. The corporation deducts the travel costs it pays (but only 50% of the cost of meals are deductible).

Illustration: Same facts as in the first illustration, except that the corporation reimburses the CFO for the cost of the entire trip, including the 3-day mini-vacation. Here, the CFO's cost for the personal portion of the trip consists of the tax he pays on the personal portion's value (hotel, meals, etc.), that must be treated as compensation income. The round-trip travel still is tax-free. The corporation's deduction consists of 50% of the meal costs while the CFO is on business travel status, 100% of the round-trip air fare, 100% of the lodging costs while he is on travel status, and 100% of the cost of the mini-vacation since it was treated as compensation paid to the CFO.

Observation: Where the employee's vacation destination is beyond the business destination, and the employer pays for the entire flight, the employee would be taxed on the additional expense of his personal trip. For example, an employee flies from Chicago to San Francisco for a four-day business trip, proceeds by plane to San Diego where he visits with relatives for two days, then flies back to Chicago. The employer pays for all of the airfare. In this instance, assuming the trip was undertaken primarily for business and was properly accounted for, the excess of the cost of the flights over the cost of the business only flight (Chicago to San Francisco and back) would be taxed to the employee as compensation. This is the rule that applies when flights are on an employer-provided aircraft; the same principle should apply when the employee flies on a commercial flight.

Personal day treated as business day: A traveler's away-from-home business trip may straddle a weekend. For example, he may have to attend business meetings on Thursday, Friday, and Monday. The traveler is too far away to travel home and then come back so he spends the weekend relaxing at the out-of-town location. Because the taxpayer must remain at the location for business reasons, the weekend days (Saturday and Sunday) should be treated as business days with expenses being deducted (50% of meal costs, 100% for other expenses) therefore excludible if the traveler is reimbursed by his employer under an accountable plan.

Saturday night stayovers: Although an employee's out-of-town business chores conclude on Friday, he may be asked to extend his business trip to take advantage of a low-priced fare requiring a Saturday night stayover, where the savings in airfare are higher than the costs of the weekend meals and lodging. In this case the employee does not pay tax on the reimbursement for his Saturday meal and lodging expenses.

Tax break for weekend travel home: A business traveler on an extended out-of-town assignment may decide to fly home for a weekend to be with the family. The cost of the weekend trip home is deductible up to the amount the traveler would have spent on meals and lodging at the out-of-town location, and therefore is excludible if the traveler is reimbursed by his employer for the trip home under an accountable plan. Note, however, that this rule applies only if the traveler checks out of the out-of-town hotel before leaving for the weekend trip home, and then re-registers. If the traveler retains the hotel room, the deduction for the weekend trip home (i.e., the airfare) is limited to what the traveler would have spent on meals during the weekend at the out-of-town location.

Reimbursements for spousešs travel costs: When an employee is away from home overnight on business, the employer may decide to reimburse his travel expenses and the travel expenses of his spouse or other travel companion. To be excludible as a working condition fringe benefit, the reimbursement for the spouse's or other travel companion's expenses must otherwise qualify for a deduction by the employee as a business expense. An amount qualifies for a deduction and for exclusion as a working condition fringe benefit if: (1) it can be adequately shown that the spouse's, dependent's, or other accompanying individual's present on the employee's business trip have a bona fide business purpose, and (2) the employee substantiates the travel (time, place, business purpose, amount of expenses, and bills and receipts) where required.

Stricter rules apply for purposes of deducting the spouse's travel expenses.

If the travel does not qualify as a working condition fringe benefit, the employee must include in gross income as a fringe benefit, the value of the spouse's or other companion's company paid travel expenses.

There may be a break for the employee even if there's no exclusion for the reimbursed travel expenses of a spouse because the rules don't require the business traveler to allocate 50% of his travel costs to the spouse. The business traveler only has to allocate any additional costs incurred for either of them. For example, in many hotels the cost of a single room isn't that much lower than the cost of a double. Thus, if a single would cost the business traveler $150 a night and a double would cost $200, and the employee is reimbursed $200 a night, only $50 would be treated as compensation income.

If you would like to find out more, please give me a call at (315) 363-3338.

Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner