By Patricia Baker, CPA

 

For many employers, business travel has become a necessary part of conducting business. The costs can be expensive for both the employer and the employee. If handled and accounted for properly, many of the costs can be fully deducted by the employer, not taxable to the employee and not subject to FICA, payroll taxes or withholding. On the other hand, if the rules are not properly applied it may result in taxable income to the employee and subject to FICA, payroll taxes and withholding. Business meals (whether travel or otherwise) are only 50% deductible. In addition, travel expenses must be considered "ordinary and necessary", not lavish or extravagant.

Under IRS regulations, advances or reimbursements to employees are deductible by the employer and not subject to FICA and income tax withholding if paid under an "accountable plan". In order to qualify as an accountable plan, expenses must meet the following criteria:

1. The employee receives the advance or reimbursement for expenses paid or incurred while performing services as an employee,
2. The employee must adequately report and account for the expenses in a reasonable period of time, and
3. The employee is required to return any excess payment or reimbursement within a reasonable period of time.

If expenses are paid under a non-accountable plan it is considered taxable compensation to the employee. It is also deductible by the employer as compensation but also subject to FICA, payroll taxes and employee withholding.

The tax law distinguishes between "business transportation" and "business travel", whereas business travel status has its tax advantages. For example, if an employer flies out of state for a business meeting and returns home the same day, it is treated as business transportation. While the cost of the air fare, taxis, etc. are fully deductible, any meals or lodging would not be deductible. If the trip is considered business travel, the cost of lodging, incidental expenses and meals are deductible. The trip qualifies for business travel if it meets the following criteria:

1. It involves overnight travel,
2. The employee is away from his tax home,
3. The trip is taken solely or primarily for ordinary and necessary business reasons, and
4. The trip is temporary.

Extended length of time that requires sleep or rest to enable the employee to continue working is the determining factor to qualify as overnight travel. This does not necessarily mean an entire night is spent away from home.   However, there is a new proposed regulation which provides an exception away from home requirement. Under the new safe harbor, local lodging may be treated as ordinary and necessary if all of the following requirements are met:

1. The lodging is necessary for the employee to participate fully in or be available for a bona fide business meeting, conference, training activity or other business function;
2. The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter;
3. The employer requires the employee to remain ant the function or activity overnight; and
4. The lodging is not lavish or extravagant and provides no significant element of personal pleasure, recreation or benefit.

One example would be a corporation conducting employee training at a local hotel near its offices. Employees attending the training are required to remain at the hotel overnight for the bona fide purpose of facilitating the training. If the lodging is paid directly to the hotel, it is treated as a Working Condition Fringe Benefit to all attendees, regardless of whether they would be on travel status. As such, this cost is deductible to the employer and not taxable to the employees.

Other than in the above exception, the employee must have a home for tax purposes and be away from it overnight in order for it to be treated as travel away from home. For example, if an employee works late at the office and decides to stay overnight at a local hotel rather than drive to his nearby home, the cost is not deductible. A taxpayer's tax home is either his regular or principal place of business, or he has no regular or principal place of business, his regular place of abode. There are some taxpayers who do not maintain a permanent residence or place of business, such as a traveling salesperson who moves from place to place. In this case, there would be no deductions allowed for meals and lodging.

A taxpayer is treated as temporarily away from home in a single location only if the assignment is reasonably expected to and in fact does last less than one year. If the assignment is reasonably expected to last more than one year, lodging and meal expenses are not deductible.