As tax attorneys in Columbus, Ohio, Nardone Limited routinely advises sole proprietors on when a taxpayer may deduct certain business expenses on Schedule C of their Form 1040 U.S. Individual Income Tax Return. Many sole proprietors seek to maximize their business expense deductions; however, sole proprietors must be cognizant of what may and may not be deducted to potentially avoid further scrutiny by Revenue Agents during Internal Revenue Service (“IRS”) audits and examinations. When the IRS audits or examines a tax return, one of the items the Revenue Agent will scrutinize and look for is deductions relating to business travel expenses. This is the third article of a three-part series that addresses deductible travel expenses for sole proprietors. Specifically, this article provides a discussion of when traveling expenses relating to spouses and family members may be deducted. See the first article of the series, Deductible Business Travel Expenses for Sole Proprietors, for a general overview of deductible traveling expenses, and the second article of the series, Deductible Transportation, Lodging, and Meal Expenses for Sole Proprietors, for an overview of deductible transportation, lodging, and meal expenses.
Separating Personal and Business Expenses
As discussed in our prior articles, when a trip combines both business and personal activities, then a taxpayer may only deduct travel expenses if the trip is primarily for a business purpose. Treas. Reg. §1.162–2(b)(1). If the trip is primarily personal in nature, then travel expenses are not deductible, even if the taxpayer conducts some business activities during the trip. Further, when the trip is primarily for business purposes, a taxpayer may deduct travel expenses that are: (i) reasonable and necessary in conducting business and (ii) directly attributable to conducting business. Treas. Reg. §1.162–2(a).
One issue that many sole proprietors face when preparing their Form 1040 U.S. Individual Income Tax Return is allocating travel expenses between business and personal expenses. This issue is further complicated when a spouse or family member accompanies the sole proprietor on a business trip. In general, a spouse’s or family member’s travel expenses are personal expenses and therefore, are not deductible. But, travel expenses relating to a spouse or family members may be deducted in limited circumstances.
Requirements to Deduct Business Travel Expenses Relating to a Spouse or Family Member
For a sole proprietor to deduct the travel expenses of a spouse or family member, the spouse or family member must: (i) be an employee or business associate who has a bona fide business purpose for traveling and (ii) otherwise be allowed to deduct the travel expense. See Internal Revenue Code (“I.R.C.”) §274(m)(3); Treas. Reg. § 1.162-2(c).
A bona fide business purpose exists when a sole proprietor can prove a real business purpose for the spouse’s or family member’s presence on the business trip. See Treas. Reg. § 1.162-2(c). But, the bona fide business purpose cannot entail mere incidental business services, such as taking notes or entertaining customers. The spouse or family member’s presence on the trip must be necessary to the sole proprietor’s business. Treas. Reg. § 1.162-2(c). If the spouse or family member is not a business associate or employee with a bona fide business purpose for traveling, who would otherwise be able to deduct the travel expenses, then the sole proprietor must strictly separate the spouse’s or family member’s expenses from the deductible business travel expenses. Treas. Reg. § 1.162-2(c). For example, a sole proprietor may believe that an invitation for a spouse or family member to attend a business meeting or convention establishes their bona fide business purpose. But, simply being invited to, and then attending the meeting, is not enough. Rather, the spouse or family member must also meet the requirements under I.R.C. §274(m)(3), including that the spouse or family member has a bona fide business purpose for attending, to have deductible travel expenses. That is, the spouse’s or family member’s presence must be necessary to conduct the sole proprietor’s business. Ultimately, a sole proprietor who brings a spouse or family member on a business trip must remain cognizant of the circumstances in which the spouse’s or family member’s travel expenses may be deducted.
Nardone Limited routinely represents individuals and businesses in federal tax matters, including taxpayers who are subjected to an IRS audit or examination by a Revenue Agent. If you are facing an IRS tax audit or examination, or if you wish to learn more about how to adequately maintain your records, contact one of our experienced tax attorneys today.