Travel can be an essential part of nonprofit operations, but when it comes to accompanying family members or companions on business trips, the rules can get tricky. While nonprofits may want to provide their employees with the option of having a spouse or companion join them on a business trip, it’s crucial to follow the IRS guidelines to avoid potential penalties. This post covers the key points about companion travel costs, how to handle them, and when they could become taxable.
What Are Companion Travel Costs, and When Are They Deductible?
For most organizations, companion travel expenses—such as those for a spouse or other individual traveling with an employee—are not deductible business expenses. In general, if an organization reimburses an employee for a companion’s travel costs, these costs are treated as taxable compensation to the employee. However, there are certain situations where companion travel can be nontaxable and deductible, as long as specific conditions are met:
- The accompanying individual is an employee or volunteer of the organization.
- The travel is for a bona fide business purpose.
- The travel expenses would otherwise be deductible by the companion.
If all three conditions are met, the reimbursement for the travel expenses wouldn’t be taxable, and the employer can claim it as a business expense.
Business Associates and Deductible Travel
The rules are a bit different for business associates. These individuals, such as clients, customers, or suppliers, whose travel is essential to the nonprofit’s business purpose, can have their travel reimbursed tax-free by the organization. As long as the business associate’s travel expenses would be deductible if they were an employee, the nonprofit can reimburse them without creating taxable income for the employee.
Working Condition Fringe Benefits: The Special Case for Non-Employees
In some cases, when a non-employee companion travels with the employee on business, the organization may reimburse the companion’s expenses as a working condition fringe benefit. This allows the reimbursement to be nontaxable to the employee if all of the following apply:
- The reimbursement is not treated as compensation.
- The companion’s travel was for a bona fide business purpose.
- The employee substantiates the expenses under an accountable plan.
If the travel is primarily personal in nature, the expenses will be considered taxable income, and the employee must report the amount as part of their W-2.
What Is a Bona Fide Business Purpose?
To qualify for tax-free reimbursement, the IRS requires the companion’s travel to serve a real business purpose. While this can sometimes be difficult to prove, the IRS does accept certain situations where the companion’s presence is deemed necessary for the business. For example, if a spouse helps promote the company’s public image or strengthens business relationships at an event, these would be considered bona fide business purposes.
However, activities like light clerical work or mere socializing are not sufficient to qualify for tax-free reimbursement. So, be careful when documenting the business purpose of companion travel.
Proper Documentation and Reporting for Companion Travel
To ensure the IRS doesn’t flag any companion travel reimbursements as personal, nonprofits should have clear travel and expense policies in place. Any travel that includes a companion should be carefully documented, noting the business purpose and individuals involved. If a companion’s travel is not related to the exempt purpose, the nonprofit must treat the reimbursement as taxable income and report it on the employee’s W-2.
The IRS pays close attention to executive compensation and may scrutinize companion travel during tax-exempt organization audits. They often look through travel logs and entertainment accounts to ensure proper reporting of personal travel expenses.
Navigating the rules for companion travel costs in a nonprofit setting can be complex, but understanding when these expenses are deductible or taxable is critical for compliance. Nonprofits should ensure they have robust policies in place to address these issues and work with tax advisors to stay on top of evolving rules. Proper documentation and reporting will help maintain transparency and prevent penalties, ensuring that your nonprofit can continue its work without unexpected tax issues.
