When the client takes some personal time on a foreign business trip, there are stricter rules regarding the deductibility of transportation expenses. The general rule says the individual must allocate his/her transportation expenses between the business and personal components of the trip [Reg. 1.274-4(f)(1)].
The good news: with a little planning, the client can take advantage of two gaping loopholes in the general rule and thereby deduct 100% of his/her transportation expenses even for foreign trips.
The One-Week Loophole
When the individual's business trip lasts one week or less, he/she can automatically deduct all transportation costs (plane fare, cabs to and from airports, etc.). No questions asked. This is true even if he/she actually spends most of his/her time vacationing. In figuring the length of the trip, do not count the departure day, but do count the return day. [Reg. 1.274-4(c).]
Of course, the individual can also deduct out-of-pocket daily living expenses (hotels, cabs, tips, 50% of meals, etc.) for all business days [IRC Sec. 162; Reg. 1.162-2(b)(1); Reg. 1.274-4(b)(1)]. However, the client cannot deduct daily living costs for vacation days [IRC Sec. 262; Reg. 1.162-2(b)(1); and Reg. 1.274-4(b)(1)].
As explained earlier, the definition of business day is pretty liberal. Weekends and holidays falling between business days count as business days. So do intervening weekdays between business days. So do standby days. Finally, we get to count days when the client intended to work but could not for reasons beyond his/her control (e.g., transportation difficulties). [Reg. 1.274-4(d), which definitely applies for purposes of the 25% Loophole explained below and presumably for the OneWeek Loophole we are talking about here as well.]
As you can see, the One-Week Loophole is a very taxpayer-friendly rule. But the main reason for the client's trip must still be for business. Otherwise, none of his/her transportation costs are deductible. [Regs. 1.162-2(b)(1) and 1.274-4(b)(1).]
The 25% Loophole
Obviously, some foreign business trips last over a week. No problem. The client should just plan ahead in order to take advantage of the 25% Loophole. If he/she qualifies, he/she can once again deduct all his/her transportation costs and all his/her daily out-of-pocket living expenses for business days (subject to the 50% rule for meals).
The trick here to make sure the client spends less than 25% of his/her total days vacationing. For this purpose, count the departure and return days as business days. The same goes for all the other types of business days listed earlier. [Reg. 1.274-4(d).] Bottom line: it is often pretty easy to qualify for the 25% Loophole.
