Although video conferencing has made inroads in the ranks of business travelers, there still are many situations where it’s necessary to travel away-from-home overnight for face-to-face meetings with staff, management, or customers. Businesspeople or professional who must travel for work reasons should keep in mind that they may be able to qualify for a travel bargain by piggybacking a vacation onto an out-of-town business trip. In effect, the business traveler gets free vacation airfare if the trip is set up the right way. And if the travel is undertaken for an employer, a properly set up reimbursement arrangement for the business portion of the trip will be income- and payroll-tax-free.

Deductions for trip undertaken primarily for business. A taxpayer who mixes a bit of pleasure with business while away from home nonetheless may deduct all of the round-trip transportation costs as long as the trip was undertaken primarily for business reasons. (Reg. § 1.162-2(b)(1)) The cost of lodging plus 50% of meals while on business status is deductible. Additionally, if the traveler is an employee reimbursed for all expenses under an accountable plan that requires a timely accounting of the time, place, and business purpose of the travel, plus receipts, the reimbursement is tax-free to the traveler (but the personal portion of the trip yields no tax benefit to the traveler).

In effect, the 100% deduction for the round-trip travel costs works as a kind of tax subsidy for a personal vacation, or as a partially tax-free perk.

Example: Jane, a self-employed information technology specialist, flies from the East Coast to Los Angeles for a 5-day business trip. She takes in three days of vacation and sight-seeing after the business part of the trip is over. As a result Jane can deduct the entire air fare and part of her mini-vacation is, in effect, subsidized by the tax break.

Assume the same facts except that Jane is employed by a corporation that reimburses her for the business portion of the trip after she submits detailed records and receipts. She pays for the personal portion of the trip (meals and lodging during the three personal days).

Under the accountable plan rules, the reimbursement for the round-trip airfare (as well as for meals and lodging while on business status) is tax-free to Jane, and is not subject to FICA or income tax withholding. (Reg. § 1.62-2(c)(2)(i), Reg. § 1.62-2(d)(1)) That’s true even though she took a mini-vacation after her business trip ended. The corporation deducts the travel costs it pays (but only 50% of the cost of meals is deductible).

When is a trip treated as undertaken primarily for business? There is no hard-and-fast rule. It depends on the facts and circumstances of each case. The regs do say, however, that the way travelers split their time between business and personal pursuits is “an important factor.” (Reg. § 1.162-2(b)(2))

Taxpayers who make a stop for personal reasons en route to a business location or on the way home should be sure to keep records of what their round-trip transportation costs would have been without the personal stop.

Saturday night stayovers. Although an employee’s out-of-town business chores conclude on Friday, he may extend his business trip to take advantage of a low-priced fare requiring a Saturday night stayover, where the savings in airfare are higher than the costs of the weekend meals and lodging. The employee doesn’t pay tax on the reimbursement for his Saturday meal and lodging expenses. (PLR 9237014) In this case, IRS said that under a “common sense test,” payments to the employee for the Saturday stay were deductible if a “hardheaded business person would have incurred such expenses under like circumstances.”

When a personal day may not be a personal day. An away-from-home business trip may straddle a weekend. For example, a traveler may have to attend business meetings on Thursday, Friday, and Monday. He is too far away to travel home and then come back (and besides, the trip back and forth would cost more than staying put), so he spends the weekend relaxing at the out-of-town location. Because he must remain at the location for business reasons, the weekend days (Saturday and Sunday) should under the “common sense test” be treated as business days the expenses for which are deductible (50% of meal costs, 100% for other expenses) or excludible if the traveler is reimbursed under an accountable plan. Note that in the context of foreign travel, IRS Pub. 463 (2010), p. 8, treats such standby days as business days.

Tax break for weekend travel home. A business traveler on an extended out-of-town assignment may decide to fly home for a weekend to be with family or friends. The cost of the weekend trip home is deductible up to the amount the traveler would have spent on meals and lodging at the out-of-town location. Note, however, that this rule applies only if the traveler checks out of the out-of-town hotel before leaving for the weekend trip home, and then re-registers. If the traveler retains the hotel room, its cost is deductible, but the deduction for the weekend trip home (i.e., the air fare) is limited to what the traveler would have spent on meals during the weekend at the out-of-town location. (IRS Pub. 463 (2010), p. 4)

Tax breaks when spouse or companion comes along. The expenses of a spouse or other companion accompanying a traveler aren’t deductible unless (1) the spouse or other companion is an employee of the taxpayer and travels for a bona fide business purpose, and (2) the expenses would otherwise be deductible by the spouse or other companion. (Code Sec. 274(m)(3)) Nevertheless, even if the spouse’s or other companion’s travel expenses aren’t deductible, a tax benefit may still be salvaged from traveling together. That’s because the business traveler’s deduction isn’t based on 50% of the trip expenses. The deduction is based on what it would have cost the taxpayer to travel alone. (Rev Rul 56-168, 1956-1 CB 93) This rule can be a money saver on accommodations. For example, where the cost of a hotel room is $200 for one occupant and $149 for two, a taxpayer on business status may deduct $149 per night, not $100, when he gets a room for two. (IRS Pub. 463 (2010), p. 5)

 President Obama has finalized his Administration’s budget proposals for fiscal year (FY) 2012 (Oct. 1, 2011 to Sept. 30, 2012). The Administration has a robust agenda of tax proposals that it will push Congress to enact, including the following ones that involve payroll issues.

Increase in the taxable wage base for unemployment tax. One proposal would increase the federal taxable wage base from $7,000 to $15,000, beginning in 2014. Federal unemployment tax (FUTA) rates would be lowered so employers’ FUTA liability would not increase. States wouldn’t be charged interest on unemployment loans from the federal government for two more years. Many states pass this cost on to employers. Employers in 31 states that haven’t repaid their federal loans for several years would not have to pay a higher federal unemployment tax rate than other employers.

Make FUTA surtax permanent. The FUTA surtax is part of the 6.2% gross unemployment tax rate that employers pay on the first $7,000 paid annually to each employee (6% permanent tax rate, 0.2% temporary surtax). The surtax has been in effect on a temporary basis since 1976. It is scheduled to expire on June 30, 2011. A proposal in the budget would keep the 0.2% FUTA surtax in effect on a permanent basis.

Reduce improper payments of unemployment insurance (UI) benefits. The budget proposal would provide additional funding to help reduce improper unemployment benefit payments and employer tax evasion. The budget notes that over $15 billion in UI benefits were erroneously paid in 2010, and the overpayment rate increased to 11%, despite the efforts by States to reduce improper payments.

Quarterly W-2 reporting. Like the FY 2011 budget, the FY 2012 budget includes a proposal that would require W-2s to be reported on a quarterly basis, rather than annually.

Repeal information reporting of payments to corporations. The 2010 Patient Protection and Affordable Care Act included a provision that, effective for payments made after 2011, would require a person engaged in a trade or business (payors) to file an information return for all payments totaling $600 or more in a calendar year to a single payee (other than a payee that is a tax-exempt corporation). Under current law, payments to corporations, except those made for medical or health care services, are not required to be reported on an information return.

A proposal in the budget would repeal the new information reporting requirements in the Health Care Act. However, the proposal would require businesses to file an information return for payments for services or for determinable gains aggregating to $600 or more in a calendar year to a corporation (except a tax-exempt corporation).

Reduce electronic filing threshold. A proposal in the budget would give IRS regulatory authority to reduce the 250 return threshold for filing information returns electronically.

Worker classification. The Administration’s budget proposal includes $46 million to combat worker misclassification, including $25 million for grants to States to identify misclassification and recover unpaid taxes, and $15 million for personnel at the Wage and Hour Division to investigate misclassification. There would be less circumstances under which service recipients would qualify for reduced penalties if they misclassify workers.

Expand work sharing. The budget proposal includes funding to encourage States to provide partial unemployment checks to workers who are part of a work-sharing arrangement. Work-sharing is a voluntary employer program that helps firms retain workers by reducing employees’ weekly hours instead of laying them off.