Anyone who spends a significant amount of time traveling for business purposes will tell you that living out of a suitcase is no fun. Despite routinely traveling to destinations many people only hope to visit, many business travelers dislike having to leave home on an extended business trip. Taking a spouse or the whole family along from time to time for a combined business trip/vacation can make the travel more enjoyable. Here are some tax rules to consider when family members accompany a business traveler.

Transportation and Lodging Costs

For a person making a bona fide business trip alone to a U.S. location, the round­trip transportation costs are fully deductible ­­ as long as the primary reason for the trip is business (as opposed to vacation/recreation). Lodging costs for the business portion of the trip are also fully deductible. When a spouse or other family member without a bona fide business purpose accompanies the business traveler, the amount deductible as a business expense is limited to the single rate cost of transportation and lodging.

Example: Ed has a four-­day trade show next month in Washington, D.C. and wants to bring along his wife and son to visit the nation’s capital. The discounted airfare for all three is $500; lodging is $500 for the four nights of the trade show. If Ed makes the trip alone, the cost of a single airline ticket will be $200 and lodging for a single occupant, $400. How much is Ed’s allowable business deduction for airfare and lodging for the family trip? $600 ­­ the single rate cost.

Note: If, instead of flying on their trip to Washington, D.C., Ed and his family drive an automobile on the most direct round­trip route, the expense will be fully deductible, since that will presumably be the single­rate transportation cost.

Primary Business Purpose

Although the tax laws contain no specific rule or definition of what constitutes a trip that is primarily for business purposes, the regulations and case law generally look to the relationship between the number of business-­versus­-personal days to make the determination. A day in which the traveler conducts bona fide business constitutes a workday, even if less than the entire day is devoted to business. Therefore, if a morning business engagement ends by noon, the traveler need not schedule afternoon business activities to preserve the day as business related.

A rule of thumb used by many business travelers is that the trip should have twice as many business­related days as vacation­related days to ensure its primary business nature. If, on a particular trip, the business purpose rule is not met, none of the round­trip transportation cost is deductible. However, for the business­related days of the trip, the single­rate lodging is deductible, as well as 50% of the business meals.

Example: If Ed and his family extended their trip by one day, Ed’s transportation and lodging deduction would not change. However, extending the trip by three days could jeopardize the primary business purpose of the trip, thus making Ed’s round­trip transportation costs nondeductible.

Before planning a business trip that includes vacation time or accompanying family members, carefully consider the tax ramifications. Call us if we may be of assistance.

Individual and business taxpayers can benefit from a variety of federal tax breaks that were extended or made permanent by the Protecting America from Tax Hikes (PATH) Act and the Consolidated Appropriations Act, 2016. Here are selected highlights.

State and local sales tax deduction.
The law gives individuals who itemize their deductions the option of deducting state and local sales taxes instead of state and local income taxes. Taxpayers who elect to do so may deduct the actual amount of sales taxes paid during the year or a preset amount from an IRS table. This provision has been made permanent.

Nontaxable IRA transfers to charities.
Taxpayers age 701/2 or older who directly transfer up to $100,000 annually from their individual retirement accounts (IRAs) to qualifying charities can exclude these contributions from gross income. If all qualifications are met, these contributions will still count toward the taxpayer’s required minimum distribution for the year. This provision has been made permanent.

Increase in expensing limits.
The law permanently extends the increased Section 179 expensing limit, allowing eligible businesses to expense, rather than depreciate, up to $500,000 per year of the cost of equipment and other eligible property placed in service during the tax year. The election is subject to a dollar-for-­dollar phase out as the cost of expensing­eligible property rises from $2 million to $2.5 million. The IRS will adjust the 179 limits for inflation.

First­-year bonus depreciation.
Eligible businesses may claim bonus depreciation for qualifying property acquired and placed in service during 2015 through 2019. The available bonus depreciation percentage depends on the year the property is placed in service: 50% for 2015 through 2017, 40% for 2018, and 30% for 2019. For certain longer­lived and transportation property, these percentages apply one year later than indicated, and bonus depreciation will be available through 2020.

Increase in “luxury auto” limits.
The new law increases the dollar limits on depreciation deductions (and Section 179 expensing) by $8,000 for vehicles placed in service after 2015 and before 2018. The limits are increased by $6,400 for vehicles placed in service in 2018 and by $4,800 in 2019.

Individuals who are working and who have low-to-moderate taxable income may qualify for this income tax credit.

When you think about ways to offset your income as you’re preparing for income tax time, do you primarily consider the deductions you can take? Things like home mortgage interest, charitable donations, and taxes you paid that can be claimed?

Allowable credits can also work in your favor. If you meet the Internal Revenue Service’s seven criteria, you may be eligible for the Earned Income Tax Credit (sometimes called Earned Income Credit, or EIC).

Note: As you read the rules that the IRS has established, keep in mind that, as with many of the agency’s regulations, there can be exceptions. We can help you determine whether you are a candidate for this credit.

If you can answer “Yes” to these seven questions, you may be able to fill in and file a Schedule EIC:

1. Is your Adjusted Gross Income (AGI) less than the IRS’s limits? For 2015, this is:
    
   • 3+ qualifying children: $47,747 ($53,267 for married filing jointly)
   • 2 qualifying children: $44,454 ($49,974 for married filing jointly)
   • 1 qualifying child: $39,131 ($44,651 for married filing jointly)
   • No qualifying children: $14,820 ($20,330 for married filing jointly)

     If you qualify for the Earned Income Credit, you’ll need to complete a Schedule EIC, which can be filed with either the Form 1040 or 1040A.
      

2. Do you have a valid Social Security number?

   If you are filing jointly, both you and your spouse are required to have valid Social Security numbers issued by the Social Security Administration (SSA) by the date your tax return is due (including extensions). Any qualifying child claimed must also have one.

3. Is your status “married filing jointly” or “head of household”?

   Couples whose filing status is “married filing separately” cannot claim the EIC. An exception here: A couple is married, but one spouse did not reside in the home at any time during the second half of the year. The spouse who remained might qualify for the EIC if his or her filing status is “head of household.”

4. Were you or your spouse a U.S. citizen or resident alien for the entire tax year?

   This is complicated. If one of you was a U.S. citizen or resident alien but the other was a nonresident alien for any part of the year, you may qualify for the EIC if your status is “married filing jointly.” If that’s the case, you will be taxed on your “…joint worldwide income.”

5. Was your income earned only in the United States and/or a U.S. possession?

   If you earned income in a foreign country and you plan to exclude it from your gross income, you cannot claim the EIC. Filing a Form 2555 (Foreign Earned Income) or Form 2555-EZ (Foreign Earned Income Exclusion) disqualifies you.

   2015 Form 1040, lines 66a and 66b (EIC information appears on lines 42a and 42b of the 2015 Form 1040A)
    

6. Is your investment income $3,400 or less?

   Simple enough. For the Form 1040, this includes:

   • Interest and dividends,
   • Capital gain net income, and,
   • Royalties and rental income from personal property.
7. Do you have earned income?

   This means wages, salaries, tips, other taxable employee pay, and net earnings from self-employment. But you may be in another situation that would make you eligible for the EIC. For example, nontaxable combat pay, ministers’ housing, and strike benefits provided by a union are considered earned income.

Only Part of the Equation

If you believe that you’re able to claim the Earned Income Credit, or if there are other tax-related topics that you don’t fully understand, we’ll be happy to look at your entire financial scenario. If you’ve filed an extension for 2015, we can work with you to make sure you’re taking all of the deductions and credits that you’ve earned.

As always, tax planning should be a year-round process. Let us know if we can help you start preparing now for next year’s filing.