Q: As a travel agency owner, I have always taken the position that all my travel expenses are tax-deductible, as I am always learning about suppliers whose services I use and destinations that I visit, so that I can better advise my clients. Whenever my spouse and I travel, I always have my corporation pay my expenses or reimburse me for my payment. Since ordinary taxpayers' vacation travel is obviously not tax-deductible, I suspect that my tax deductions fall into a somewhat gray area and may be subject to disqualification in an Internal Revenue Service (IRS) audit. Are there any precedents holding that an agent's or agency owner's travel expenses are tax-deductible? If so, what are the limits, and what substantiation is needed to prove the business purpose of my travel?
A: According to my research, there are no court decisions, IRS regulations or IRS guidance involving travel agents or travel agencies. That is really a pity, because I know that many agency owners take such deductions, and some published legal guidance on the subject would be very helpful.
For businesses in general, the law is that "if a taxpayer travels to a destination at which he engages in both business and personal activities, the travel expenses to and from the destination are deductible only if the trip is related primarily to the taxpayer's trade or business."
If you or your employees advise clients about suppliers and particular destinations, it is certainly arguable that your trip to such a destination is "related primarily to the taxpayer's trade or business." Therefore, your expenses for airfare, hotels, car rentals and tours should be deductible, at least in theory.
When it comes to travel, the tax law is stricter than it is for any other business expense, such as rent or office supplies. Specifically, you must not only prove your business purpose, but you must also satisfy tough substantiation rules.
You must keep "adequate records or by sufficient evidence corroborating the taxpayer's own statement, each of the following elements: 1) The amount of each separate expenditure; 2) the dates of departure and return and the number of days spent on business; 3) the place of destination by name of city or town; and (4) the business reason or expected business benefit from the travel."
In most cases, the IRS would probably disallow your travel expenses if you did not have "adequate records or sufficient evidence corroborating your statement." Without such records or evidence, the IRS or a court would not even need to address the main question of whether the trip was "primarily related to the taxpayer's trade or business."
Additionally, for foreign travel of more than one week, cruises abroad, meetings on cruise ships, entertainment and meals, even tougher rules apply. You may be able to comply with them if you know them and are a careful record keeper.
However, you should rely on the advice of a CPA or tax lawyer when it comes to applying the law to the particular facts of your situation. There are nuances and exceptions to every tax question, and there might be practical reasons why you would not want to raise too big a red flag and thereby trigger an audit, even if you are legally entitled to a deduction.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].