You made it back to the U.S. from your international business trip with progress on the big deal and souvenirs for your family, but did you know that you may also be able to significantly reduce your next tax bill thanks to your stint abroad? A bevy of travel-related tax deductions are yours for the taking if they fall within the guidelines discussed below.
Who knew jet-setting could be so profitable? This article gives a brief overview of allowable travel deductions under U.S. tax rules before focusing on rules specific to international travel for work purposes.
For both domestic and international trips, you can deduct the “ordinary and necessary” expenses incurred for travel “away from home,” so long as they are related to your job.
The U.S. Internal Revenue Service (IRS) says that an “ordinary” expense is one that's “common and accepted in your trade or business,” and a “necessary” expense is one that’s “helpful and appropriate” for your work.
There’s a fair bit of leeway in satisfying these requirements. The IRS specifically notes that a cost doesn’t need to be required in order to be considered “necessary” for purposes of travel-related deductions. See the next section for guidance on what kind of costs typically pass muster.
For international travel, the “away from home” requirement is almost always satisfied. You’re considered, in the eyes of the IRS, to be traveling “away from home” if your work duties require you to be outside the area of your “tax home” (for most people, the place they live and work) for significantly longer than “an ordinary day’s work, and you need to either rest or sleep to fulfill your job duties while you’re away from home.”
Deductions for business travel apply only to “temporary” work on the road. Time away from home for work in a single location is generally considered an “indefinite assignment,” and therefore doesn't lend itself to tax deductibility, if it lasts longer than one year. Note that a series of short assignments to the same location that cumulatively add up to a “long period” may be considered an indefinite assignment as well.
The following expenses, when incurred while traveling for work, are usually deductible:
This list isn't exhaustive - you can claim a deduction for other costs as long as they’re legitimately business-related and “ordinary and reasonable.”
There’s a twist for international travel for work purposes - you can’t deduct the entirety of what it cost you to get to and from the foreign country if the trip wasn’t either “entirely for business” purposes or “considered entirely for business” purposes.
Travel is “entirely for business” purposes, as far as the IRS is concerned, if you spend virtually all waking hours of your time abroad on business activities. In such a case, you can deduct the whole cost of getting to and from the foreign country.
If you can swing it time-wise, you definitely want to get at least a bit of sightseeing in while you’re abroad, right? Not to worry, you meet the “considered entirely for business” - and can still deduct the entire cost of transportation to and from the country abroad - if you:
Satisfying any of the four tests enumerated immediately above will make your international business trip “considered entirely for business”, meaning you can deduct all expenses for transportation to and from the country abroad. You paid $2,000 for that round-trip plane ticket to Saigon? Deduct it all.
If you don’t meet one or more of those conditions and the trip wasn’t entirely for business, but the trip was stillprimarily for business purposes, you can deduct only a portion of the transportation costs for traveling there and back. (You can’t deduct any portion of the travel costs for getting to and from the point abroad if the IRS believes other motivations, like vacationing, were the main purpose of your trip.)
To determine how much you can deduct for a trip that’s primarily for business purposes, you have to consider whether each day was a “business day” or a “non-business day,” and then divide the former by the total number of days the trip consumed to get to the proportion of the amount of transportation costs you can deduct. In other words, the number of business days serves as the numerator, while the denominator is the number of non-business days plus business days (i.e., the whole length of the trip).
If, for example, your trip was ten days long, with four of them business days and six devoted to non-business pursuits, you’d divide four by ten (i.e., 4/10), which gets you 0.40 - this means 40% of your days were “business days.” You could accordingly deduct 40% of the cost of your round-trip travel expenses. If your plane ticket was $1,500, you could deduct $600 (because 1,500 x .4 = 600).
A “business day” includes any day on which your presence in the foreign country was required or days on which your “principal activity during working hours” related to business matters, as well as days you were in transit. Weekends and holidays also count as business days if they are bookended by business days (for more on this, see the discussion on the “Sandwich Rule” in the article “Combine Work with Pleasure and Still Deduct Travel Expenses.”
Due to space limitations, this article does not address all nuances related to international business travel tax deductions (for example, the special rules for attendance at business conventions held outside the United States). Your tax professional can make sure you benefit to the maximum extent possible with respect to your taxes for work-related travel abroad.