Foreign Travel Expenses

Background. Many ministers have traveled to foreign countries. In some cases, the trip is primarily for church-related activities. In others, it is primarily a vacation. In many cases, there are elements of both “business” and pleasure. How should church treasurers report the church’s reimbursement of travel expenses incurred by a minister under these circumstances?

A recent case. A nurse attended an international health conference in China at which she had been invited to present a paper. The participants in the conference were public health professionals from around the world. The nurse spent 2 days attending the formal conference proceedings that included panel sessions and the presentation of papers (including hers). On 7 of the remaining 11 days, the conference participants, including the nurse, made conference-sponsored trips to medical facilities and met with local health officials, for either half of the day or for the entire day. Two days were fully devoted to sightseeing. The nurse deducted all of the costs of her trip (meals, food, lodging, transportation) as a business travel expense. The IRS audited her tax return, and disallowed any deduction for her travel expenses. It concluded that the trip was not primarily for business. The nurse appealed to the Tax Court.

The Court’s ruling. The Court ruled that the nurse could deduct all of her travel expenses incurred during the trip to China. It observed:

The regulations provide that travel expenses are deductible only if the trip is related primarily to the taxpayer’s business. One of the important factors in deciding whether a trip is primarily business or personal is the amount of time spent on each activity. In an example in the regulations, if 1 week is spent on business and 5 are spent on vacation, the trip is primarily personal. Thus, if one-sixth of the time is spent on business and the rest is personal, the trip is primarily personal. Further, the regulations provide that expenses paid or incurred in attending a convention may be ordinary and necessary depending on the facts and circumstances of each case.

Based on our review of the record, we believe that [the attempt by the IRS] to portray [the nurse’s] trip to China as a personal sightseeing junket are unavailing. While it is true that she spent a certain amount of time touring the Great Wall and other sites of interest, a far greater proportion of her time was spent visiting hospitals and medical clinics accompanied by Chinese health officials or participating in the formal presentation of papers. Visiting medical facilities is not personal recreation. On the contrary, we believe it bears a direct relation to her work as an educator in the public health field and is accordingly an ordinary and necessary business activity with respect to petitioner. Consequently, her travel to China and participation in the conference activities were primarily for business reasons within the meaning of the regulations.

The Court allowed the nurse to claim the following “ordinary and necessary” travel expenses: airfare to China, the conference fee, visa fee, books regarding China, travel insurance, slides for presentations, tips, breakfast, taxi, customs fees, parking, and meals. However, the court also noted that the nurse claimed several additional expenses with respect to the China trip that were purely personal or living expenses which were not deductible.

The Court did not allow the nurse to deduct travel expenses incurred within China, because she lacked adequate substantiation. The income tax regulations provide the following explanation of the substantiation required for travel expenses incurred while away from home:

[The] amount of each separate expenditure for traveling away from home, such as cost of transportation or lodging, except that the daily cost of the traveler’s own breakfast, lunch, and dinner and of expenditures incidental to such travel may be aggregated, if set forth in reasonable categories, such as for meals, for gasoline and oil, and for taxi fares.

The Court concluded that the nurse failed to meet this standard with respect to travel expenses incurred while in China, since the meals, lodging, and travel expenses were not separately accounted for, as required by the regulations.

The tax code and regulations. The tax code and regulations directly address foreign business trips. Here is a summary of the rules:

1. Foreign travel entirely for business. If your trip to a foreign country is entirely for business, then all of your travel expenses are deductible (and reimbursable under an accountable arrangement). Travel expenses include such items as transportation, meals, and lodging.

2. “Safe harbors”. Some foreign trips are treated as if they were entirely for business, even though they were not. As a result, all travel expenses are deductible (and reimbursable under an accountable arrangement). Here are the four safe harbors recognized by the tax code and regulations:

• No substantial control. A foreign trip is considered entirely for business if you did not have substantial control over arranging the trip. You do not have substantial control merely because you had control over the timing of the trip. But you will be considered to have substantial control over a trip if you were reimbursed or paid a travel expense allowance for a trip, and you are not a “managing executive”. A “managing executive” is an employee who has the authority and responsibility, without being subject to the veto of another, to decide on the need for the business travel.

Tip. Clergy who report their federal income taxes as self-employed are more likely to have substantial control over arranging business trips. This means that it is less likely that they will qualify for this rule.

• Trips of less than one week. A trip is considered entirely for business if it involves travel outside the United States for a week or less—even if the trip combines both business and nonbusiness activities. One week means seven consecutive days. In counting the days, do not count the day of departure, but do count the day of return to the United States.

• Less than 25% of time on personal activities. A trip is considered entirely for business if you were outside the United States for more than a week, but you spent less than 25% of the total time you were outside the United States on nonbusiness activities. For this purpose, count both the day your trip began and the day it ended.

• Vacation not a major consideration. Your trip is considered entirely for business if you can establish that a personal vacation was not a major consideration, even if you have substantial control over arranging the trip.

Tip. If you do not meet any of the above exceptions, you may still be able to deduct some of your expenses.

3. Travel Primarily for Business. If you travel outside the United States primarily for business purposes but spend some of your time on nonbusiness activities, you generally cannot deduct all of your travel expenses—unless you qualify for one of the four exceptions summarized above. You can only deduct the business portion of your cost of getting to and from your destination. You must allocate the costs between your business and nonbusiness activities to determine your deductible amount. How do you make this allocation? In general, if your trip outside the United States was primarily for business, you must allocate your travel time on a day-to-day basis between business days and nonbusiness days. The days you depart from and return to the United States are both counted as days outside the United States. To figure the deductible amount of your round-trip travel expenses, multiply your expenses by the following fraction: The numerator (top number) is the total number of business days outside the United States; the denominator (bottom number) is the total number of travel days outside the United States.

Your business days include transportation days, days your presence was required, days you spent on business, and certain weekends and holidays. Count as a business day any day your presence is required at a particular place for a specific business purpose. Count it as a business day even if you spend most of the day on nonbusiness activities. Also, count as a business day any day you are prevented from working because of circumstances beyond your control. Count weekends, holidays, and other necessary “standby days” as business days if they fall between business days. But if they follow your business meetings or activity and you remain at your business destination for nonbusiness or personal reasons, do not count them as business days.

4. Travel primarily for vacation. If you travel outside the United States primarily for vacation, the entire cost of the trip is a nondeductible personal expense. This is true even if you spend some time attending brief professional seminars or a continuing education program. You can, however, deduct your registration fees and any other expenses incurred that were directly related to your business.

Caution. If you travel by ocean liner, cruise ship, or other form of luxury water transportation for the purpose of carrying on your trade or business, there is a limit on the amount you can deduct. You cannot deduct more than twice the federal “per diem” rate allowable at the time of your travel. For purposes of this limit, the federal per diem is the highest amount allowed as a daily allowance for living expenses to employees of the executive branch of the federal government while they are away from home but in the United States.

5. Conventions held outside North America. You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside North America unless the meeting is directly related to your trade or business. Also, it must be as reasonable to hold the meeting outside North America as in it. If the meeting meets these requirements, you also must satisfy the rules for deducting expenses for business trips in general, discussed above. The following factors must be considered in deciding if it was reasonable to hold the meeting outside North America: (1) the purpose of the meeting and the activities taking place at the meeting; (2) the purposes and activities of the sponsoring organizations or groups; and (3) the homes of the active members of the sponsoring organizations and the places at which other meetings of the sponsoring organizations or groups have been or will be held.

Relevance to church treasurers. The following examples illustrate many of the rules summarized above. They are based on examples contained in the regulations:

Example. A church board authorizes Rev. G to travel to Mexico City to conduct religious services on three consecutive days. He leaves on a Saturday, conducts services on Sunday through Tuesday, goes sightseeing on Wednesday and Thursday, and returns home on Friday. Since Rev. G’s business trip outside the United States lasted for less than 7 days, his travel expenses for the entire trip are treated as business expenses. This means that he can deduct them on his tax return, or the church can reimburse them fully. If the church has an accountable reimbursement arrangement, its reimbursement of these expenses is not reported as taxable compensation on Rev. G’s W-2 or 1099.

Example. Same facts as the previous example, except that Rev. G goes sightseeing for an entire week. Rev. G will only be able to treat a portion of his travel expenses as a deductible business expense. He multiplies his total travel expenses times a fraction whose numerator is the total number business days (3) and whose denominator is the total number of travel days (12). This is the amount that Rev. G can deduct, or that the church can reimburse. If the church has an accountable reimbursement arrangement, its partial reimbursement of these expenses is not reported as taxable compensation on Rev. G’s W-2 or 1099.

Example. Rev. N goes on a 10-day tour of Israel. He has no business functions or activities, other than the enrichment of his ministry. This trip is primarily for vacation, and so Rev. N’s travel expenses are not tax-deductible. Any reimbursement of his expenses by the church must be reported on his W-2 or 1099 as taxable compensation.

Example. Rev. C traveled to Brussels primarily for business. He left Denver on Tuesday and flew to New York. On Wednesday, he flew from New York to Brussels, arriving the next morning. On Thursday and Friday, he was engaged in business activities, and from Saturday until Tuesday, he was sightseeing. He flew back to New York, arriving Wednesday afternoon. On Thursday, he flew back to Denver. Although he was away from his home in Denver for more than a week, he was not outside the United States for more than a week. This is because the day he departed does not count as a day outside the United States. He can deduct the cost of the round-trip flight between Denver and Brussels. He can also deduct the cost of his stay in Brussels for Thursday and Friday while he conducted business. However, he cannot deduct the cost of his stay in Brussels from Saturday through Tuesday because those days were spent on nonbusiness activities. The church can reimburse the portion of Rev. C’s travel expenses that are tax-deductible. If the church has an accountable reimbursement arrangement, its partial reimbursement of these expenses is not reported as taxable compensation on Rev. C’s W-2 or 1099.

Example. Rev. J travels from Seattle to Taiwan, where he spends 14 days on a preaching and teaching mission and 5 days on personal matters. He then flew back to Seattle. He spent one day flying in each direction. Because only 5/21 (less than 25%) of his total time abroad was for nonbusiness activities, he can deduct as travel expenses what it would have cost him to make the trip if he had not engaged in any personal activity. The amount he can deduct is the cost of the round-trip plane fare and 16 days of meals (subject to the 50% limit), lodging, and other related expenses. Alternatively, the church can reimburse Rev. J’s travel expenses. If the church has an accountable reimbursement arrangement, its reimbursement of these expenses is not reported as taxable compensation on Rev. J’s W-2 or 1099.