Question

2. Travel Expenses (LO. 3)

Olga has to travel to Philadelphia for 2 days on business. She enjoys history and is planning to visit the Liberty Bell and other historic sites in the city. If time permits, she would like to make a side trip to nearby Gettysburg. A friend of Olga’s tells her, “The best part of traveling on business is that once the business is over, you can sightsee all you want and the cost is tax-deductible.” Olga, who is self-employed, has scheduled her trip for the Labor Day weekend so that she can spend 3 days sightseeing. Complete the letter to Olga which outlines the tax travel expense rules.

Dear Olga,

I am writing to outline the rules surrounding the deductibility of business travel expenses. First, based on your activities, one must determine if the trip is predominately business or pleasure. To determine this, first determine the percentage spent on business activities. The percentage is calculated by taking the 2 days of business and dividing by the total trip days, or %___________.

Based on your business activity percentage, your transportation will not be

deductible. Your other expenses would be deducted as follows:

Lodging: allocated for business percentage only

Meals: 50% of the allocated for business only

Incidentals: allocated for business percentage only

Answer 1

Solution:-

• Olga’s friend has provided her with poor advice. Only the business portion of a combined business and personal trip is deductible.
• In determining whether the travel cost of a combined business and personal trip is deductible, the taxpayer must determine whether the primary purpose of the trip is business or pleasure. This is determined based on whether more days were spent on business than for pleasure.
• In Olga’s case, because only 2 days are spent on business while 3 days are for pleasure, the primary purpose of the trip is considered pleasure. Therefore, Olga will not able to deduct the cost of her travel to Philadelphia.
• However, she can deduct her lodging, meals (limited to 50%) and the cost of incidental expenses (laundry, tips etc.) for the two business days. The costs of the remaining three days are considered nondeductible personal expenditures.