Business travel expenses could someday become a thing of the past, considering meetings can now be conducted by Skype and other web-based conference options. However, travel is still an important way public relations agencies conduct business.
Tax rules for business travel
Generally, for federal tax purposes, a PR agency may deduct all ordinary and necessary expenses paid or incurred in carrying on its business. This includes travel expenses that aren’t deemed “lavish or extravagant” or that are for personal purposes.
For employees, business travel expenses funded by employers are typically considered working-condition fringe benefits and, therefore, aren’t included in the employee’s gross income. This exclusion generally applies to property or services provided to an employee so that employee can perform his or her job.
Under the Internal Revenue Code, an advance or reimbursement for travel expenses to an employee under an “accountable plan” is deductible by the employer PR agency and not subject to FICA and income tax withholding. In general, an advance or reimbursement is treated as made under an accountable plan if an employee receives the advance or reimbursement for a deductible business expense paid or incurred while performing services for his or her employer. The employee also must account for the expense to the employer within a reasonable period and in an adequate manner and return any excess reimbursements or allowances within a reasonable period of time.
By contrast, an advance or reimbursement made under a “non-accountable plan” isn’t considered a working condition fringe benefit and is treated as compensation. Thus, the amount is fully taxable to the employee, and is subject to FICA and income tax withholding by the employer.
What’s a reasonable period of time?
A reasonable period of time depends on the facts and circumstances, but there are two safe harbor methods:
• Advance payments made within 30 days of when an expense is paid or incurred.
• Substantiation provided within 60 days after expenses are paid or incurred; or
• Return of the excess amounts within 120 days after the expenses are paid or incurred.
Under a so-called periodic statement method, the employer must:
• Give each employee periodic statements no less than quarterly that set forth the amounts paid under the reimbursement arrangement in excess of the substantiated amount; and
• Request that the employee either substantiate or return the excess amounts within 120 days of the statement date. An expense substantiated or amounts returned within that period satisfies the reasonable period requirement.
Status is crucial
Although business transportation—going from one place to another without an overnight stay—is deductible, attaining “business travel status” fully opens the door to substantial tax benefits. Under business travel status, the entire cost of lodging and incidental expenses, and 50 percent of meal expenses are generally deductible by the employer that pays the bill. What’s more, those amounts don’t equate to any taxable income for employees who, as mentioned, are reimbursed under an accountable plan.
So, how does a business trip qualify for travel status? It must involve overnight travel, an employee traveling away from his or her tax home (see subsequent discussion) and a temporary trip undertaken solely—or primarily—for ordinary and necessary business expenses.
Overnight travel doesn’t mean an employee must be away from dusk till dawn. Any trip that’s long enough to require sleep or rest to enable employee to continue working is considered “overnight.”
The concept of a tax home
One aspect of business travel taxability that many companies struggle with is the concept of a tax home. The IRS allows deductions for meals and lodging on business trips because these expenses are duplicative of costs normally incurred at the employee’s home and require them to spend more money while traveling. Consequently, a taxpayer can’t claim deductions for meals and lodging unless he or she has a tax home for tax purposes and travels away from it overnight.
Further, under IRS final regulations, there’s an exception under the local, no lavish lodging expenses incurred while not away from home overnight on business if all the facts and circumstances so indicate. One factor specified under the regulations is whether the employee incurs the expense because of a bona fide employment condition or requirement.
Tax cuts and the Jobs Act
By now, most employers and employees have filed their 2018 tax return. For employees, most have realized that previously miscellaneous itemized deductions are no longer available. Therefore, if an employee incurs a business expense that’s considered reimbursed as compensation or not reimbursed at all, under changes under the TCJA, these expenses incurred will no longer be tax-deductible.
There are a lot more to these rules than what I’ve written. It’s therefore important to consult a tax professional who can review your specific facts and help you stay on top of the latest developments. You may want to consult your attorney to help you draft an accountable plan that will meet the requirements of the tax law.
Richard Goldstein is a partner at Buchbinder Tunick & Company LLP, New York, Certified Public Accountants.