Saturday night special.

Taxpayers and the Internal Revenue Service for years have struggled over the issue of which expenses incurred by taxpayers may be deducted while they are away from home on business.

TRAVEL COSTS

To be deductible, travel expenses must be paid while the taxpayer is away from home in the pursuit of a trade or business. Only such expenses as are reasonable and necessary in the conduct of a taxpayer's business and directly attributable to that business may be considered. Ira trip is solely for business, all reasonable and necessary costs (including travel fares, meals and lodging plus incidental travel expenses) are deductible. Ira trip combines both business and personal aspects, the trip's purpose must be examined. If the trip relates primarily to business, the travel costs are deductible; if not, none of the travel costs can be deducted. However, the other expenses properly allocable to the trip's business portion may still be taken as business expenses.

The key to any business expense's deductibility is that the expense must be ordinary and necessary. Ordinary and necessary expenses must be reasonable in amount, have a definite reasonable purpose connected with the business and be calculated to achieve the desired result. To determine whether costs are ordinary and necessary, normal business practices are followed. The test is basically a commonsense test of whether a hard headed business person would have incurred the expenses.

SATURDAY NIGHT STAYS

Under current domestic airline price structures, travelers who stay at their destinations over a Saturday night may pay prices substantially less than the normal fares. For business travelers (and their employers) who are willing to meet the requirements for the discounted fares, this may pose a dilemma. If an employee returns from an out-of-town business meeting on Friday night or during the daytime on Saturday or travels to a Monday meeting on Sunday, a considerably higher cost will be incurred for the air travel. On the other hand, if an employee or other taxpayer extends his or her trip (at either the beginning or the end) in order to take advantage of the lower airfare, there is the question of whether the costs incurred as a result of that Saturday night stay will be deductible as business expenses.

IRS LETTER RULING 9237014

In this ruling, a corporation that continuously faced this very situation proposed to change its corporate travel policy and requested guidance from the IRS. Under its proposed revised procedures, the company would pay for the cost of one additional night's lodging and one additonal day's meals for an employee who, at the employer's convenience, spent one additional day at the temporary business location. This arrangement would be approved only if the sum of the airfare and the additional costs was less than the lowest available airfare not involving a Saturday night stay at the time the original trip was booked.

The IRS ruled that, taking into account all applicable limitations (such as the 80% rule for meals and entertainment), these incremental costs would be deductible; since the company did not treat reimbursments or allowances for travel expenses incurred by its employees as additional compensation, any extra costs incurred by the company's employees would be valid business expenses (again, subject to whatever limitations might be applicable).

For a discussion of this letter ruling and other items of interest, see the Tax Trends department in the November 1992 issue of The Tax Adviser.

Nicholas Fiore, editor The Tax Adviser