Section 274(c) -- Foreign Travel Expense Disallowance
Section 274(c) Foreign Travel Disallowance Rule Basics
In addition to navigating the SIFL, Section 280F qualified business use rules and the Section 274 entertainment and commuting expense disallowance rules, any foreign travel must also be evaluated under Internal Revenue Code Section 274(c). Section 274(c) provides generally that in the case of any individual who travels outside the United States away from home in pursuit of a trade or business or in pursuit of an activity described in section 212 (activty for the production of income), no deduction shall be allowed for that portion of the expenses of such travel otherwise allowable which, under regulations prescribed by the IRS, is not allocable to such trade or business or to such activity. This disallowance rule does not apply, however, to the expenses of any travel outside the United States away from home if (A)such travel does not exceed one week, or (B)the portion of the time of travel outside the United States away from home which is not attributable to the pursuit of the taxpayer’s trade or business or an activity described in section 212 is less than 25 percent of the total time on such travel.
One Week and 25% Tests
In determining whether travel was in excess of 1 week, the day in which travel outside the United States away from home begins shall not be considered by the day in which such travel ends shall be considered. Treasury Regulation Section 1.274-4(c) Complicating matters, in testing whether nonbusiness activity constitutes 25% or more of the total travel time, both the day of departure and return are counted. Treasury Regulation Section 1.274-4(c)
Only Applicable to Individuals
Section 274(c) by its terms only apply to individuals. Hence, an employer which is an recognized entity (as opposed to a sole proprietor or single member LLC) is not subject to disallowance under this subsection. Employees who travel on an employer's aircraft, however, are subject to special SIFL rules for international travel subject to Section 274(c).
Narrow definition of United States
For purposes of Section 274(c), the term United States includes only the States and the District of Columbia. It does not include U.S. possessions such as Puerto Rico and Guam.
If Section 274(c) is determined to be applicable, the disallowance rule generally operates to disallow the applicable travel expenses by multiplying them by a fraction, the numerator of which is the number of non-business days during such travel and the denominator of which is the total number of business days and nonbusiness days during such travel. If the nonbusiness activity is at, near or beyond the business destination for the trip, then the applicable amount of travel expense shall be the amount of travel expenses, otherwise deductible, which would have been incurred in traveling from the place where travel outside the United States began to the business destination and the direct return (disregarding any subsequent personal travel). If the nonbusiness destination is on the route to or from the business destination, the amount of the travel expense shall be the amount of travel expense, otherwise allowable as a deduction, which would have been incurred in traveling from the place where travel outside the United States away from home begins to the nonbusiness destination and returning.
Section 274(c) shall not apply if the individual traveling does not have substantial control over arranging the business trip. Control over the timing of a trip is not substantail control for purpose of this exception. In the case of an employee traveling for his or her employer, the employee will not be treated as having substantial control over arranging the trip unless they are a managing executive (person who by reason of authority and responsibility can decide on the necessity of the trip) of the employer or related to the employer under certain attribution rules outlined in the regulations.
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