Spousal Travel Expenses: Tax Deduction Eligibility

If you're considering bringing your spouse on your next business trip, you may be wondering if their travel expenses are tax-deductible. While the general rule is that personal expenses are non-deductible, there are exceptions depending on your spouse's role in your business and the purpose of the trip. Here's what you need to understand about spousal travel expenses and tax deductions.

Spousal travel expenses and taxable compensation

Spousal travel expenses are generally not tax-deductible, as they are considered personal expenses. However, there are certain conditions under which spousal travel costs can be deducted. This applies to both self-employed individuals and employees of a company.

Self-Employed Individuals

If you are self-employed and your spouse travels with you for business purposes, their travel expenses are typically not tax-deductible. The only exception is if your spouse is an employee of your company and their presence on the trip serves a bona fide business purpose. In such cases, their travel costs can be deducted just like those of any other employee.

Even if your spouse's presence does not meet the criteria of a bona fide business purpose, you can still deduct your own expenses that may also benefit them. For instance, if you share a hotel room, you can deduct the full cost of the room as your spouse's lodging does not incur additional charges. Similarly, if you drive your car or rent one, the cost remains the same regardless of the number of passengers, so you can deduct the full amount. However, any additional costs exclusively for your spouse, such as meals, entertainment, and other incidentals, need to be accounted for separately and are not tax-deductible.

Employees of a Company

If you are an employee of a company and your spouse joins you on a business trip, their travel expenses are usually considered personal and are not deductible. However, there are specific criteria that need to be met for spousal travel expenses to be tax-deductible. These criteria are outlined below:

• Employee Criteria: Your spouse must be an employee of the same company.
• Business Purpose Criteria: The trip must have a bona fide business purpose, meaning your spouse's presence is essential to the success of the trip. Their role should go beyond simply attending social functions or taking notes during meetings.
• Deductible Expenses Criteria: All other regular IRS rules for deductible travel expenses must be met. The expenses should be reasonable and not lavish or extravagant.

In summary, while spousal travel expenses are generally not tax-deductible, there are exceptions. For self-employed individuals, spousal travel costs can be deducted if the spouse is an employee of their company and their presence serves a bona fide business purpose. For employees of a company, spousal travel expenses can be deducted if the spouse is also an employee of the same company, their presence on the trip has a bona fide business purpose, and the expenses meet the regular IRS rules for deductible travel.

Spousal travel as a working condition fringe benefit

Spousal travel expenses are generally considered taxable compensation to the employee and are included in the employee's wages. However, there are certain conditions under which spousal travel can be excluded from gross income as a working condition fringe benefit.

Spousal travel is considered a working condition fringe benefit when:

• The expense qualifies for deduction by the employee under IRC Section 162(a).
• The spousal travel has a bona fide business purpose.
• The employee substantiates the travel.

For spousal travel expenses to qualify as a working condition fringe benefit, the trip must have a bona fide business purpose. This means that the spouse's presence is essential to the success of the business trip. For example, if the spouse is required to attend meetings, assist with presentations, or fulfil other significant roles. Simply having them answer a few emails or take notes during a meeting doesn't count.

If spousal travel is considered a working condition fringe benefit, it is excludable from wages for purposes of Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax.

It is important to maintain proper records to substantiate the business purpose of the spousal travel. This includes documentation of the spouse's role in the business, the purpose of the trip, and a detailed account of their activities during the trip. All receipts and invoices related to the trip, such as flight tickets, hotel bills, etc., should be retained.

Deduction disallowance

Treas. Reg. 1.162-2(c) states that when a taxpayer's spouse accompanies them on a business trip, their travel expenses will not be deductible unless the spouse's presence serves a bona fide business purpose. This means that the spouse must have an active role in the business activities conducted during the trip. Their presence at business entertainment functions or the performance of services that are primarily social in nature, such as typing notes or assisting with clerical duties, do not qualify as a bona fide business purpose.

IRC Section 274 generally disallows certain types of expenses. However, it provides an exception for expenses treated as compensation under IRC Section 274(e)(2). This exception does not apply if the spouse's travel expenses are already deductible by the spouse or if they are not an employee of the employer.

IRC Section 274(m)(3) further emphasizes that no deduction is allowed for travel expenses paid or incurred for a spouse, dependent, or other individual accompanying an employee on business travel unless all three of the following conditions are met:

• The spouse, dependent, or other individual is an employee of the employer.
• The travel of the spouse, dependent, or other individual has a bona fide business purpose.
• Such expenses would be otherwise deductible by the spouse, dependent, or other individual.

In addition, the limitations imposed by IRC Section 274(m)(3) do not apply if the employer treats the spousal travel amount as compensation as per IRC Section 274(e)(2). In such cases, the employer can deduct the amount paid for spousal travel as compensation, and the employee must include the full amount in their gross income without any exclusions.

IRC Section 274(m)(3)

First Condition: The spouse, dependent, or other individual accompanying the taxpayer on business travel must be an employee of the taxpayer. This means that they must have a bona fide job with documented responsibilities and their employment must be considered "ordinary and necessary" for the taxpayer's business operations.

Second Condition: The travel of the spouse, dependent, or other individual must serve a bona fide business purpose. In other words, their presence on the trip must be essential to the success of the business activities. They should have substantial roles to play during the trip, such as attending meetings, assisting with presentations, or fulfilling other critical tasks.

Third Condition: The travel expenses incurred for the spouse, dependent, or other individual would be deductible if they had travelled alone for the same purpose. This means that the expenses must be reasonable and not lavish or extravagant.

It is important to note that the limitations outlined in IRC Section 274(m)(3) do not apply if the taxpayer's employer treats the spousal travel expenses as compensation under IRC Section 274(e)(2). In such cases, the spousal travel expenses are deductible by the employer as compensation, and the employee must include the full amount in their gross income without any exclusions.

Bona fide business purpose

For spousal travel expenses to be tax-deductible, the spouse's presence on the trip must have a "bona fide business purpose". This means that the spouse must be a bona fide employee of the business, with an actual job and documented responsibilities, and their employment must be "ordinary and necessary" for the running of the business.

The trip itself must also have a bona fide business purpose. The spouse's presence must be essential to the success of the trip. For example, they may be required to attend meetings, assist with presentations, or fulfil other significant roles. Simply answering a few emails or taking notes during a meeting does not count. The spouse must have an active role in the business activities conducted during the trip.

In addition, the expenses must be "reasonable and not lavish or extravagant", and they must otherwise be deductible by the spouse. If the spouse's presence on the trip does not meet the bona fide business purpose, some expenses that benefit the spouse may still be deductible, such as hotel rooms and rental cars, as long as any additional costs for meals, entertainment, and other incidentals are accounted for separately.

It is important to note that the IRS tends to scrutinize travel expenses, and the burden of proof lies with the taxpayer. Therefore, it is recommended to maintain thorough records documenting the spouse's role in the business, the purpose of the trip, and a detailed account of their activities during the trip, along with all receipts and invoices.

Frequently asked questions