5 tips for when an employee combines business and personal travel

5 tips for business and personal travelOrdinary and necessary expenses for an employee’s business travel paid by an employer are generally excludable from the employee’s income. That includes meals, lodging, phone calls, supplies and maybe even laundry service. Yet, an employee’s massage or tennis lesson while traveling on business is not a business expense — nor is a spouse’s sightseeing outing. It’s fine for employees to mix business with pleasure, as long as they’re clear about it because the IRS may well want a clearer look. When determining business versus personal travel expenses, keep these considerations in mind:
  1. When a trip is primarily business and within the U.S., the entire cost of traveling to and from the destination is excluded from the employee’s income. But if the trip is primarily personal, the entire cost has to be included in the employee’s income.
  2. Whether travel is classified as primarily business or primarily personal depends on all the facts and circumstances, but the amount of time spent at the destination on business versus personal activity is an important factor. For example, if you flew on Monday, took Tuesday as a vacation day, and met with clients on Wednesday and Thursday before flying home, then you spent more time on business than personal activities, so the trip was primarily for business.
  3. Once the employee reaches the destination, the rules don’t vary based on whether the trip is primarily business or personal. Costs at the destination paid by the employer that relate to business are excluded from the employee’s income. If the employer pays any costs not related to business, such as a massage or tennis lesson, those costs have to be included in the employee’s income.
  4. Travel expenses paid by an employer for a spouse, a dependent or another accompanying individual are not excludable from the employee’s income unless there is a bona fide business purpose for that person’s travel.
  5. For travel outside the 50 states, the cost of traveling to and from the destination paid by the employer must be allocated between business and personal, and the portion allocated to personal must be included in the employee’s income.

There are exceptions to having to allocate costs:

  • Travel does not exceed seven consecutive days (not counting the departure day but counting the return day).
  • Personal time is less than 25% of total trip time.
  • The employee did not have substantial control over arranging the trip, except for the timing.
  • The employee does not have the authority to decide on the necessity of the trip.
  • Personal vacation was not a major consideration in making the trip.

If any of the exceptions apply, allocation between business and personal is not required. 

Where and how people work has evolved. Employers need to know the tax considerations for varied arrangements, including when an employee works from a home office.

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