When CPAs and employees extend their business travel through a weekend, many come back confused on the tax treatment for their trips. They often find themselves unsure of how much of their journeys are tax deductible. The following hypothetical situations will help elevate confusion and make your next business trip a little clearer on paper.
Brittrache's travel policy will reimburse Tim for his actual out-of-pocket expenses for the three-day trip including airfare, hotel, taxi fares, meals, and tips. However, the Brittrache travel policy allows Tim to extend his stay if the net airfare savings to the company resulting from his Saturday night stay exceed the additional cost of reimbursement for additional meals, travel, and lodging. This policy will allow Tim to spend the weekend after the seminar at Mandy's house, go sailing on the Chesapeake, and fly back to Cleveland on Sunday evening. Tim's additional costs will include a rental car, a crab-cake dinner for himself and Mandy, and charter fees. (The charter fees are not reimbursable under Brittrache's policy.)
For the Seattle trip, Tim has agreed to stay over Saturday but only if he can stop in Las Vegas for the weekend on his way back. Tim's additional costs include a room at Bellagio (Tim doesn't gamble enough to get a complimentary room.), meals, taxi fare, and some gambling losses incurred while betting on the Browns/Steelers game. (The gambling losses are also not reimbursable under Brittrache's policy.)
Tim will stay in Clearwater over the weekend because the Friday and Saturday night hotel and meal expenses will be substantially less than a return flight to Cleveland on Friday and a one day, round-trip flight from Cleveland to Clearwater on Monday. Tim will incur additional meal and lodging expenses as well as greens fees (not reimbursed by Brittrache) over the weekend in Clearwater. Can Brittrache deduct expenses paid to Tim for the personal portion of the trips, and does Brittrache have to include any portion of the reimbursements in Tim's income?
General rules for business/personal travel
When someone travels for business and combines some pleasure activities with the business trip, he or she may deduct the full round-trip transportation costs so long as the primary purpose of the trip is business. The full cost of lodging and 50 percent of the meal costs incurred while on the business portion of the trip also are deductible.
Normally, reimbursement for travel expenses would be included in the employee's income; however, under the accountable plan rules, these reimbursements may be excluded from income, avoiding both income and payroll taxes 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 company making the payment, (2) every reimbursed expense is properly accounted for to the employer within a reasonable time, and (3) any excess of reimbursement over expenses is returned within a reasonable period of time. In the absence of special rules that apply to business travel, each of Tim's trips would result in significant taxable income to him. Generally, employees are taxed on the fair value of any items of personal benefit received from their employer, unless the item's value is de minimis, so insignificant that accounting for it is unnecessary. Application of this rule standing alone would result in Brittrache including the fair value of hotel costs and meal reimbursements on Tim's W-2 for the weekend days on each of the three trips. However, each of these trips has some special rules that apply to allow substantial costs to be reimbursed by Brittrache and excluded from Tim's taxable wages.
Saturday night stay-over rules
The business portion of Tim's Washington, D.C., trip concluded on Friday, but he agreed to stay Saturday night to reduce the total cost to Brittrache. The IRS has addressed the effect of Brittrache's company policy in Private Letter Ruling 9237014. This private letter ruling (PLR) states that where the sum of the actual airfare paid plus the incremental expenses of the additional meals and lodging is less than the lowest available airfare (not involving a stay until Sunday) when the trip was originally booked, the incremental expenses are deductible business expenses to the employer under §162(a)(2) subject to the §274(n) limits on meals. Of course, private letter rulings cannot be used or cited as precedent. In addition, the amounts are excluded from the employee's income subject to either the per diem or accountable plan rules depending on company policy. The ruling states that the additional costs of staying Saturday night are deductible as whenever a, "hard-headed business person would have incurred such expenses under like circumstances."
Saturday night stay-over at additional destination
The Las Vegas trip appears to raise an additional issue. On the surface, it would appear that Tim's trip is of such a personal nature (vacationing in a city away from the business site) that any costs related to the gambling junket would necessarily be included in his income. However, the IRS has not issued guidance beyond the "hard-headed business person" rule of PLR 9237014. Therefore, if Brittrache's travel policy meets the standards of PLR 9237014 and allows Tim to travel to Las Vegas (assuming the short-notice airfare to Seattle is relatively expensive), his additional expenses should be excludible/deductible under the PLR.
Business trips that include weekends
The tax treatment of Tim's trip to Clearwater is not as certain. Since he is too far from home to travel back to Cleveland for the weekend, Tim's stay in Clearwater should be treated as consisting of entirely business days. However, the IRS has not ruled that a weekend stay straddled by a business trip constitutes additional business days at the business location.
The IRS has issued a related ruling under the now-superseded substantiation rules for per diem allowances. In these cases, per diem allowances for meals were deemed substantiated if they were $14 per day or less for travel periods of fewer than 30 days or $9 per day for periods greater than 30 days. For these purposes, brief incidental travel away from the location of the employee's away-from home business site (such as weekend trips home to visit family) did not reduce the number of days the employee is considered to be at the business site. Based on this ruling, Tim could argue that a similar rule should be applied to his business trip that straddles a weekend and that the weekend personal days should actually be counted as additional business days for reimbursement purposes so long as the costs incurred do not exceed the cost of a round trip home for the weekend.
Conclusion
When employees ask if they can stay for the weekend, employers with extended stay policies should carefully articulate those policies to employees. The IRS' "hard-headed business person" standard applied in PLR 9237014 creates a position for employers to argue that such policies do not result in additional income inclusion for employees. Until additional, authority with precedent value is available, employers will be forced to interpret this standard and attempt to apply it to their own travel policies.
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