All taxpayers who own their own business deduct travel and transportation on income tax returns as either a business expense for themselves or as a reimbursement to their employees or subcontractors. However, many honest hardworking business owners are reluctant to deduct the full extent of their travel, transportation, and related expenses because they know their unique circumstances or “history” are not adequately documented to separate out the personal part of the business trip from the business part of the business trip. I call this the “Law is on your Side Conundrum.” (LSC) You know the law is on your side but you still feel danger. But there is a safer way to travel the “IRS World”. So get ready to “Travel IRS Style” to a happy and safe destination you will cherish: When we arrive you will the proud owner of a bullet proof tax return that can keep you safe and protected during even the fiercest attack from IRS natives. Hang on to your seats because this trip will fly you and your family far away from the LSC that is keeping you all home.
As we take off on this journey you will notice the law is very clear: Travel must be business related, reasonable and customary for similarly situated businesses. No personal travel allowed. It sure seems like LSC is present here keeping us at home this summer. But we all know there is both personal and business on every trip. The government of course knows this too. Courts have held that whether the primary purpose of the trip is business or personal depends on all the facts and circumstances, in particular, the amount of time during the trip that the taxpayer devoted to business and personal activities. Sec. 1.162-2(b)(2), Income Tax Regs. Also cited in NOZ AND MAGUIRE v IRS, Docket No. 4993-10
Clearly the Maguire’s had no clue how much danger they were in on as they traveled the “world according to IRS” because they never saw the LSC prior to filing their tax return. Facts in Maguire case are simple: Mr. and Mrs. Maguire traveled for academic research and deducted $18,543 in travel on their tax return with no extemporaneous recordings of history. The Court disallowed all their travel expenses in part because the taxpayer did not offer any evidence, testimonial or otherwise, as to how they allocated their time between activities related to their research collaboration and other work activities. Id at 27. The Court also noted that neither petitioner offered any details concerning the nature of their research collaboration, the collaborative activities undertaken, their research objectives, or how the travel expenses contributed to the accomplishment of these research objectives. Both petitioners testified that their travel allowed them to collaborate with each other and researchers at other institutions, but they did not identify a single one of the other researchers by name, nor did they identify a single meeting with another researcher that took place during any of their trips. Because we cannot ascertain from the record the dates of all of Maguire’s flights, we cannot calculate exactly what portion of the year the petitioners spent in the same country. Id at 27.
Let’s look at another taxpayer in the textile business who is the poster boy for how not to “Travel IRS Style”. OLAGUNJU v COMMISSIONER, T.C. Memo. 2012-119 Docket No. 6073-10. 4_23_2012. Olagunju deducted travel expense for his textile and consulting business which the IRS disallowed. Mr. Olagunju did not keep a travel log. Mr. Olagunju’s broad testimony that he traveled to Nigeria to tend to the textile business matters is insufficient to establish the business purpose of each trip. Id at 18.
Finally, a fun case and easy read, ANN JORGENSEN v COMMISSIONER T.C. Memo. 2000-138 Docket No. 19001-98. 4_13_2000. Fun because Ms. Jorgensen, a high school teacher in the San Francisco public school system won against the IRS ProSe, and easy because Special Trial Judge Dean, drives home the difference between personal and business travel: Judge Dean reads the IRS map as follows: “The amount of time during the trip which is spent on activities directly relating to the taxpayer’s trade or business relative to the amount of time devoted to personal activity is an important factor in determining the trip’s primary purpose. See McCulloch v. Commissioner, supra; sec. 1.162-5(e), Income Tax Regs. Petitioner’s travel to Greece and Southeast Asia undoubtedly involved significant elements of personal pleasure; however, we are satisfied that petitioner’s primary purpose in undertaking the travel was to maintain and improve her skills as an English teacher//at Abraham Lincoln High School //” Id at 21.
How about you all? Are you planning to travel for business this summer? Make sure your CPA and tax advisor bullet proofs next years tax return by helping you create a record, a history of your travel in the making, recording that history for insertion in a tax return prior to filing that tax return. History created with “extemporaneous” recordings whether through pictures, video, audio or dictation can make the difference between winning and losing in US Tax Court when you have LSC. Did you create a truthful historical record of what actually happened prior to filing your income tax return? Will your tax return open and honestly disclose this history when you file your tax return next April? Have you consulted with your professional tax advisor? If you answered yes, your tax return is wearing a bullet proof shield. You will be safe. You have successfully navigated around the LSC as you “Travel IRS Style”. See you when you get back and safe travels.
Thanks for visiting us at TaxView with Chris Moss CPA. See you next time on TaxView.
Chris Moss CPA