 welcome to the session in which we'll discuss travel expense. Specifically, we need to differentiate about travel expense when it comes to self-employed individual versus employee. Now, when you are a self-employed individual and you incur travel expense, this expense, this deduction goes on schedule C and it's deducted for AGI. If you are an employee, your deduction will go on schedule A and it's a deduction from AGI. Just let me clarify this one more time. So if we're looking at your form 1040, at some point, you're going to get to your adjusted gross income. Schedule C, any deduction above AGI is called for AGI. Any deduction below AGI is from AGI. This is for. So when you have a business schedule, while you're going to prepare schedule C, then schedule C eventually will go into your line on your 1040 on a line above AGI. This is the AGI line. If it's above AGI, it's for AGI. In the prior session, we looked at the transportation expense when it comes to self-employed versus employee and basically transportation expense going from point A to point B, transportation. In this session, we would look at travel and we need to know that travel is different than transportation. Some students mix the two up. Now, travel is totally different. Travel is more encompassing. Travel include hotels and lodging as well as meals. So we're going to go ahead and start to discuss what are the rules for travel expense, what's deductible, what's not. And again, different rules for self-employed and employee. I will keep mentioning this as we go along. Let's go ahead and get started. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true, false questions, as well as exercises. Go ahead, start your free trial today. Travel expense. What's the definition of a travel expense? Travel expense is expenses incurred while away from your tax home on business. So you're away from something called the tax home. Now we're going to have to define what the tax home is. And this includes transportation to go from point A to point B, lodging 50% of meals and incidentals. Now what is tax home? This is important because the definition is you have to be away from tax home and on business. Tax home is where you spend most of your time and or derive most of your income. And this is important. Now most of the time, 99% of the time, we know what our tax home where do we spend most of the time and or derive most of our income, usually where we live and where we work. So if you work, if you live somewhere and you work for a company, you know where your tax home is. Now we're going to see in some circumstances that that may not be as clear as that. Away from home is when you are more than 24 hours. One day business trip is not enough. So for example, I'll tell you sometime I attend seminars or conventions in Pittsburgh and Pittsburgh is six hours from where I live. We have five hours that's safe around five hours. What I do in the morning, I leave very early in the morning to get there by eight. Then I leave like an hour early, like in the evening, and I'll get back home. So I spend that day close to 16 hours away from home between travel and attend in the convention, because I just don't want to sleep overnight. Well, that's not away from home because one day business trip is not enough. You have to require resting and rest and require that you stay overnight. Now substantial time requires rest, sleep or leave from work period. Well, if I don't do that, that's not away from home. That's not away from home. Now if you are reassigned for an indefinite period of time, let's assume you work for a company and your location is New York City. They assign you to Herzberg in Pennsylvania. Well, if that's the case, if they assign you for more than a year, then Herzberg becomes your home. Even though you are reassigned, but since you are there more than a year, that becomes your tax home. That becomes your tax home. You're no longer away if you are assigned to a location more than a year. Let's take a look at a few examples to illustrate these concepts. Noah operate a consulting practice in Philadelphia, but due to the increased client responsibilities, Noah has many clients in New York City. He thought he needed to open an office in New York City. So what he did, he opened an office and he started to travel. He dedicated three months traveling from Philadelphia to New York City to train a new manager to take over the operation. Now obviously, after commuting for few days or few weeks from Pennsylvania to New York City on 95, he found out that's not a good idea. So what he did, he chose to rent an apartment in New York where he would reside during the work week. On weekends, he would return back home and spend time with his family and children. Now for tax purposes, Noah can deduct certain expenses related to his stay in New York, because he's staying there for three months. Okay, this includes rent, meals, laundry, incidental and automobile expense directly associated with his time spent in New York, because he's there temporarily. Now, any transportation exceeding the cost of meals and lodging during his weekend trips, remember, during the weekend, he's traveling back to his family in Philadelphia. So any transportation expense greater than the cost of meal and lodging during his weekend trip is not deductible, because if he stayed in New York, he could deduct the dose. But if he spent more on transportation expense than those, then he cannot deduct them. But now let's assume that's changed the scenario. Now this is changing the scenario. Noah determined that he was most suitable candidate to take care of his New York office. And as a result, he made a decision to relocate there permanently. Now his wife and children still living in Philadelphia until the school ends. Well, once he decides to relocate to New York City, he's no longer away from home. That becomes his home. That becomes his permanent home. Therefore, any expense incurred while he's in New York, they can no longer be away from home. So you have to understand once he once he said, you know what, I'm gonna go there and live in New York. That's no longer temporary. Therefore, you can no longer away from home. Let's look at another scenario where it's a little bit odd. Okay, tax home where you spend most of your money or derive most of your income. Let's look at Tony was a single and he drives a long haul truck, stays at his mother's house during the holidays and uses her address, but does not contribute to its upkeep. So basically, he owns a truck and he travels for for work. And he uses his home, his mother's address as his address. So he received mail and on holidays, he visits, but he does not upkeep the house. In other words, he's not maintaining a home. Okay, now since Tony lacks a regular place of duty or residence, his tax home is considered where he works, which is on the road. Now, why this case is important, because the IRS had a similar case where a truck driver wanted to deduct all the meals, everything, all the expenses that he incurs on the road. So the court says not at all, your home is the road, your home, because you don't have a location. Your location is where you derive most of your income. So as a transient worker, Tony is always considered to be at home means at work. And therefore, the cost of his meals and lodging while traveling are personal expenses and cannot be deducted. Let's take a look at another example. Joe, a physical therapist resides with his family in Westchester, Pennsylvania. Every year, he works for the Miami Dolphins in Florida for seven months, earning a salary of 180,000. During that time in Miami, he rents an apartment. And during the off season, he goes back to Westchester and work at ACAC, earning a salary of 25,000. Okay, now what's his tax home? Well, Miami is his tax home, not Westchester. Okay, as a result, his living expenses in Miami, such as food and lodging cannot be deducted. Let's talk about conventions, especially if you're a future CPA, you're going to be attending many convention and conferences for certified for continuous professional education. So what are the rules for if you attend convention or conferences? If they are business related business related means they are related to your business. You could attend any convention you would like to for personal enjoyment, for personal growth, that's different. Here we are discussing conventions and conferences that are business related, for example, you know, continuous professional education is a good example of that. If you are self employed, and you're attending those business related convention, does that deductible is for AGI. If you are an employee, well, that's a schedule, I assume your employer don't reimburse reimburse, obviously, if your employer reimburse you, you don't get a deduction. Okay, let's take a look at this example far had a CPA and a passionate about cryptocurrency. I'm not at all that I'm just making up the example. So my job is, I'm a certified public accountant, I have my own practice, but I like to trade cryptocurrency. Travels to Las Vegas to attend a two day seminar dedicated to the latest advancement in the cryptocurrency industry. And that's not what I do in my business. I don't I'm not really, you know, my practice is not related to cryptocurrency. Well, I did this because of my own enjoyment. I like to follow cryptocurrency. I cannot claim that deduction, I cannot claim the deduction for travel expense. Now, if we change the scenario here, and let's assume I'm attending a seminar about the taxation of cryptocurrency, and I run a CPA firm, I prepare taxes, maybe, maybe I have clients that trade cryptocurrency, or maybe I want to solicit clients that trade cryptocurrency, then the travel expense is deductible. Now, also to claim a deduction, a taxpayer must physically attend the convention alongside other participants. So I cannot go there and just register and go, you know, go sightseeing or just go there and gamble in Las Vegas. Okay, or simply watching or listening to the recorded session at a later time does not qualify. So I would say, okay, but I did view it. It was recorded and I view it, I view it later. No, when you travel, you have to be there in person. Okay, so you cannot, for example, vacation during the convention and watch the videos afterward. Okay, but let's assume you opted, you opted to watch the videos rather than go into the convention. If you did that, okay, for example, if you had to rent any facilities, pay a fee, then that's deductible. That's deductible. That's a different story. But traveling, meals, and entertainment, that's no longer deductible. More about conventions. How about if you take your spouse or dependent? Sometime what happened is you go on these conventions, for example, to Las Vegas, and you bring along your wife. Well, no deduction if no business purpose. Okay, let's assume Mrs. Farhat, my wife, she's a project manager at Johnson & Johnson accompanied me to attend the cryptocurrency taxation seminar in Las Vegas. She just came along. Well, guess what? Her expenses is not deductible because she's a project manager at Johnson & Johnson, and the seminar is about cryptocurrency taxation about my business. Okay, unfortunately, no deduction is allowed. Let's assume on the other hand, my wife works as a bookkeeper for my practice. In this case, she's learning something about taxation, how to keep track of trades, cryptocurrency taxation, that's totally different. Then under those circumstances, her expenses are deductible. So for it to be deductible, it has to be business related. Sometime what happened is this, you travel on business, but at the same time, you combine business and pleasure. So you're traveling for a business, you're going to Denver, you're going to Colorado, you're going to California for a few days for business, you extend your stay for pleasure or personal purposes. Now only business expenses are deductible. That's the case. Non-transportation, meals, taxi fare, lodging, those must be allocated between business and personal days. So if there's personal days not deductible, the business ones are deductible. How about transportation, which is here we're talking about airfare? Okay. Is this deductible or not? Well, let's talk about domestic travel. We're traveling within the US because there are different rules within the US and outside the US. If the trip is primarily business, how do we know the trip is primarily business? You look at the total number of days, let's assume you are there for five days, and you are there for on business for four days, that's 40%. That's not, it has to be greater. Six days, six over 10 is 60%. It has to be more than 50% for the trip to be a business trip. If that's the case, then you can deduct your transportation, deduct your transportation. If the trip is not primarily business, nothing, you will get nothing. So if it's four out of four out of 10 days, which is 40%, you cannot deduct 40%. It's going to be zero, zero. So in the current year, Adam travels from LA to New York with the primary purpose of conducting business. He dedicated five days to business activities and three days for sightseeing. So again, total of eight, five divided by eight is greater than 50%. His transportation expense included including plane and taxi fares, 1,250. Adam's meals reach 150 per day and that's expensive in New York City, but since the trip is primarily for business, only in the meals for the five days are deductible. So he paid 150 per day. We're going to take 150 times five days. Remember, the meals are deductible up to 50%. Then you multiply that by 50%. And we'd learn a little bit more about meals and entertainment, which is no longer allowed, but they go together. So therefore meals is 375. Also his lodging and incidental expenses for five days are deductible, assuming it's 200 times five, it's $1,000. Therefore, the transportation is deductible, the 375 is deductible, and the five days at the hotel is deductible. If the business was not primarily for business, that means if he spent, let's assume less business days, three out of the eight business days switch, then those will not be and will have to prorate the other for only three days. And the transportation will not be deductible. That's not a percentage. Well, sometimes what's going to happen is you're going to travel overseas or foreign travel. There are slightly different rules for foreign travel. Okay, sometimes you travel and you combine business and travel, you go to Italy and it's on a business trip, but also you'll take a few days. Transportation expense must be allocated between personal and business. So now you allocate the transportation expense unless the taxpayer is away for seven days or less. So if the trip is seven days or less, and less than 25% of the time was for personal, so the majority of it has to be business. No allocation is required if the taxpayer has no substantial control over the arrangement of the trip. Of course, if you are going, if someone sending you, if your company is sending you and they're determining your arrival date and your return date, then you have no control over this. Then you don't allocate at this point. If the trip is primarily pleasure, it means it doesn't meet those two conditions. It's more than seven days and less than 75% is for business. Forget about the transportation expense. You can no longer do that. Now, how do we count for travel days? Business days, there's no weekends, legal holidays, assuming the days before and after our business days. Let's take a look at this example. Adam, a business professional, took a trip from New York to Japan and 20x trade. The purpose of the journey was primarily business. He was away from home from April 10th till the 19th, which is 10 days. Of these 10 days, he spent three days for personal, therefore seven days for business. Seven divided by 10 equal to 70%. 70% is less than 75%. Now we're going to have to allocate the transportation. Airfare 5000, meals $150 per day, lodging an Incidental 350. How much of his trip is deductible? Well, the transportation, because it's less than 75%, it's going to be 5000x70%. It's going to be seven days each meal. Every day he spent 150x50%. That's 525. $350, the incidentals and lodging times seven, which is the business, 3,500. Now, how about if eight days were business? If eight days were business, then the airfare will be 100% and those will be obviously eight business days. So it makes a difference. What should you do now? Whether you are a CPA candidate, enrolled agent or an accounting student, go to Farhad Lectures and you need to work more MCQs, multiple choice to understand these topics and do better. Good luck, study hard and of course, stay safe.