Tax-smart domestic travel: Combining business with pleasure

Summer is just around the corner, so you might be thinking about getting some vacation time. If you’re self-employed or a business owner, you have a golden opportunity to combine a business trip with a few extra days of vacation and offset some of the cost with a tax deduction. But be careful, or you might not qualify for the write-offs you’re expecting.

Basic rules

Business travel expenses can potentially be deducted if the travel is within the United States and the expenses are:

  • “Ordinary and necessary” and
  • Directly related to the business.

Note: The tax rules for foreign business travel are different from those for domestic travel.

Business owners and the self-employed are generally eligible to deduct business travel expenses if they meet the tests described above. However, under the Tax Cuts and Jobs Act, employees can no longer deduct such expenses. The potential deductions discussed in this article assume that you’re a business owner or self-employed.

A business-vacation trip

Transportation costs to and from the location of your business activity may be 100% deductible if the primary reason for the trip is business rather than pleasure. But if vacation is the primary reason for your travel, generally no transportation costs are deductible. These costs include plane or train tickets, the cost of getting to and from the airport, luggage handling tips and car expenses if you drive. Costs for driving your personal car are also eligible.

The key factor in determining whether the primary reason for domestic travel is business is the number of days you spend conducting business vs. enjoying vacation days. Any day principally devoted to business activities during normal business hours counts as a business day. In addition:

  • Your travel days count as business days, as do weekends and holidays — if they fall between days devoted to business and it wouldn’t be practical to return home.
  • Standby days (days when your physical presence might be required) also count as business days, even if you aren’t ultimately called upon to work on those days.

Bottom line: If your business days exceed your personal days, you should be able to claim business was the primary reason for a domestic trip and deduct your transportation costs.

What else can you deduct?

Once at the destination, your out-of-pocket expenses for business days are fully deductible. Examples of these expenses include lodging, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days aren’t deductible.

Keep in mind that only expenses for yourself are deductible. You can’t deduct expenses for family members traveling with you, including your spouse — unless they’re employees of your business and traveling for a bona fide business purpose.

Keep good records

Be sure to retain proof of the business nature of your trip. You must properly substantiate all of the expenses you’re deducting. If you get audited, the IRS will want to see records during travel you claim was for business. Good records are your best defense. Additional rules and limits apply to travel expense deductions. Please contact us if you have questions.

How-To Travel for Pleasure Tax-Free

We live in a global society. As a CPA I am constantly traveling to meet clients or attend tax conferences. If your trip is set up properly, you can reap the tax benefits of travel while still making time for pleasure. I’ve assembled this short blog with some of the highlights every business owner should know.

The regulations on travel can be quite complex and dry, so I will try to make this post as digestible as possible.  The IRS travel rules can be beneficial for every business, but are especially important for small business owners and those who are self-employed.

The most important rule to remember is that a business can deduct 100% of the round-trip transportation costs for a trip undertaken primarily for business. This means if John flies from Austin to Denver for a 5-day business conference and spends 2 days exploring Denver for pleasure, he may still deduct the entire round-trip airfare, giving him a tax-subsidized mini-vaca. Its important to note that the rules vary slightly for individuals employed by a corporation.

If the trip is undertaken primarily for personal reasons, but there is some business being done during the trip, only business related meals and lodging are deductible as travel expenses.

One of my favorite rules in the code I like to refer to as the “sandwich rule”. If you are traveling out of town for a meeting that straddles or “sandwiches” the weekend, you may be entitled to business deductions on Saturday and Sunday, even though you are not satisfying any business purpose. As a small business owner, let’s say you have meetings on Thurday, Friday, and Monday. You fly to Austin Wednesday night, and stay until Monday night, because flying back and forth out of Austin would not be cost efficient under the “common sense test”.  You spend the weekend in Austin rockin’ out at ACL, and get to deduct Saturday and Sunday lodging and 50% of meal expenses as well! Not bad.

Okay, now lets say you want to take your spouse with you. While the expenses your spouse incurs are not deductible (unless they are an employee and serve a bona fide business purpose), a tax benefit still exists. The travel deduction isn’t limited to 50% of the trip expenses, but rather what the trip would have cost if the taxpayer decided to travel alone. To illustrate this concept, lets say that you need a rental car while in Austin for business; 100% of the rental vehicle would still be deductible because its the same price if you were traveling alone.

The best part about these rules is that travel outside the U.S. is generally treated the same as travel within the U.S.

Be on the lookout for a follow up blog on business travel in the next few days where I will show you even more ways to deduct travel for pleasure!

For more information on travel tax benefits available to companies and self-employed individuals, feel free to contact me at paul@launchconsultinginc.com