Do It Right!
Do you want to plan a vacation but are dreading all the cost? Here is the good news that you already know. You can consider combining the costs of business travel with some added vacation time and business travel is tax deductible. Even better news: if the trip is primarily for business, you can within good conscience, add on a few vacation days and still deduct the trip from your taxes. Unfortunately, you can’t just jump on the next plane to the Bahamas and write the trip off as one giant business expense. To write off travel expenses, the IRS requires that the primary purpose of the trip needs to be for business purposes
Even though it is advisable not to exploit this deduction, it is a good practice to understand how to leverage the process to save on your taxes and get some R&R while you’re at it. I have some steps to guide you to what qualifies as a travel expense, and how to not cross the line. The savings won’t be immediate, but you’ll appreciate them come tax time next year. The trick is, you’ll have to add a bit of work into your leisure time. According to basic business practice, any item deemed “ordinary and necessary” as it pertains to your work or business can be considered a tax write off.
Remember, the moment your getaway crosses the line from “business trip” to “vacation” (e.g. you spend more days toasting your buns than closing deals) you can no longer deduct business travel expenses.
Generally, a “vacation” is:
- A trip where you don’t spend most of your days doing business
- A business trip you can’t back up with correct documentation
However, you can still deduct regular business-related expenses if you happen to conduct business while you’re on vacay. Here’s how to make sure your travel qualifies as a business trip:
1. You need to leave your tax locale
Your tax locale is where your business is based. Traveling for work isn’t technically a “business trip” until you leave your tax locale for longer than a normal workday, with the intention of doing business in another location.
2. Your trip must consist “mostly” of business
The IRS measures your time away in days. For a getaway to qualify as a business trip, you need to spend most of your trip doing business.
If you go away for a week (seven days). You spend five days meeting with clients, and a couple of days lounging on the beach. That qualifies as business trip.
But if you spend three days meeting with clients, and four days on the beach? That’s a vacation. Luckily, the days that you travel to and from your location are counted as workdays.
3. The trip needs to be an “ordinary and necessary” expense
“Ordinary and necessary” is a term used by the IRS to designate expenses that are “ordinary” for a business, given the industry it’s in, and “necessary” for the sake of
What qualifies as “ordinary and necessary” can seem like a gray area at times, and you may be tempted to fudge it. Our advice: err on the side of caution. if the IRS chooses to investigate and discovers you’ve claimed an expense that wasn’t necessary for conducting business, you could face serious penalties.
4. You need to plan the trip in advance
You can’t show up at Universal Studios, hand out business cards to everyone you meet in line for the roller coaster, call it “networking,” and deduct the cost of the trip from your taxes. A business trip needs to be planned.
Before your trip, plan where you’ll be each day, when, and outline who you’ll spend it with. Document your plans in writing before you leave. If possible, email a copy to someone so it gets a timestamp. This helps prove that there was professional intent behind your trip. The days that you travel to and from your location are counted as workdays.
Understand that the rules are different when you travel outside the United States
Business travel rules are slightly relaxed when you travel abroad. If you travel outside the USA, you only must spend at least 25% of your time outside of the country conducting business for the getaway to qualify as a business trip. If you travel outside the USA but spend less than 25% of your time doing business, you can still deduct travel costs proportional to how much time you do spend working during the trip.
For example, say you go on a five-day international trip. If you spend two days conducting business, you can deduct the entire cost of the airfare as a business expense—because two days out of five is equivalent to 40% of your time away. However, if you only spend one day out of the five-day trip conducting business—or just 20% of your time away—you would only be able to deduct 20% of the cost of your airfare, because the trip no longer qualifies as business.
Here are some business-related travel expenses you might be able to deduct if you itemize your taxes:
- Travel: If the primary purpose of your trip is business-related, you can write off your transportation costs. If you’re driving to and from your destination, your deduction would be 50 cents per mile.
- But even if your vacation is pleasure first, business second, some of your travel expenses can be deducted. Pay attention to the miles it takes to travel from your hotel to the trade show or other event you’ll be attending. You can use the 50-cent-per-mile rule for that portion, and any other business portion, of your trip.
- Hotels: Lodging expenses can also be deducted. Turbo Tax cautions that only the days used for business can be counted toward this.
- Meals: Naturally you must eat while you’re away. Here again, deductions can be made only for meals related to business. Keep in mind that the write off is for 50% of your meal, and that Uncle Sam may get a little suspicious if your write-off meals have a pattern of including filet mignon and a $300 bottle of wine.
- Also note that you can only write off your portion of the meal, but not your entire family. However, if you go to lunch with a group of peers and you decide to spring for the bill, you can include all the meals on the 50% deduction.
- Events: You can deduct the cost of entry to a business-related event and any materials that you might need to purchase for an out-of-town seminar. Just think logically: If something you’re purchasing isn’t directly related to the business portion of your trip — e.g., taking your family of five to Disney World while you attend an industry conference in Orlando — you shouldn’t try to claim it on your taxes.
- Turning Your Vacation into a Business Trip
- Now that you’re jazzed about writing off some or all your vacation, let’s think about some ways you can rack up tax deductions on your next out-of-town adventure:
- Attend a Seminar
- Any conference that relates to your job and can help you further your knowledge can be considered a tax deduction. This is correct if the course relates to your job skills, you can deduct your travel costs and the cost of the education.
- If you already have a summer vacation planned, check the websites of professional organizations to see if a conference will be taking place while you’re at your destination. Be sure you can allow time during your trip to attend the appropriate sessions.
Here’s a way to do something good for others as well as for your bank account. If you do volunteer work away from home, your expenses can be deducted as an unreimbursed charitable contribution as long as you itemize your deductions and you must be able to show there’s no significant element of pleasure, recreation, or vacation in the travel.
Take that trip and bring friends & family on a business trip
Remember, you need to take a vacation and get away from your work for you own wellbeing! Don’t feel like spending the vacation portion of your business trip all alone? Well, if you are so busy, make sure you combine some travel into your busy schedule and bring friends and family with you! While you can’t directly deduct the expense of bringing friends and family on business trips, some costs can be offset indirectly.
Driving to your destination
Have three or four empty seats in your car? Feel free to fill them. If you’re traveling for business, and renting a vehicle is a “necessary and ordinary” expense, you can still deduct your business mileage or car rental costs even when others join you for the ride. One exception: If you incur extra mileage or “unnecessary” rental costs because you bring your family along for the ride, the expense is no longer deductible because it isn’t “necessary or ordinary.”
The cost of breaking the rules
Don’t bother trying to claim a business trip unless you have the paperwork to back it up. Use technology to track business expenditures (especially when you travel for work). If you claim eligible write offs and maintain proper documentation, you should have all the records you need to justify your deductions during a tax audit.
Speaking of which, if your business is flagged to be audited, the IRS will make it a goal to notify you by mail as soon as possible after your filing. Usually, this is within two years of the date for which you’ve filed. However, the IRS reserves the right to go as far back as six years.
Form 8725 can help you avoid tax penalties
If you think a tax deduction may be challenged by the IRS, there’s a way you can file it while avoiding any chance of being penalized. File Form 8275 along with your tax return. This form gives you the chance to highlight and explain the deduction in detail.
Separating personal expenses from business expenses is key to claiming legitimate business deductions. While filing business tax returns, be sure to claim only those deductions that are genuinely associated with your business operations. If unsure, you should turn to a professional rather than handle it yourself.
As a small business owner, how do you differentiate between your personal and business expenses with regards to claiming tax deductions?
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. PMI Gulf Coast assumes no liability for the opinions expressed in this article.