Are you ready to get away from the cold and the snow and escape to a beautiful, warm beach somewhere? Or maybe the snow doesn’t sound so bad and you’re dreaming about hitting the slopes at a ski resort?
If you’re self-employed or a small business owner, you know that it’s not always easy to get away. Unlike your friends with office jobs, you don’t have paid vacation days and there’s not always someone to take care of your clients while you’re gone.
However, small business owners have a unique advantage — and that’s the ability to mix business and pleasure when it comes to travel. Done right, it is possible to enjoy a few days of much-needed R&R while also lowering your tax bill.
Here’s a break down of what you need to know in order to legally expense parts of your vacation travel.
The Primary Purpose of the Trip Needs to Be Business
The first thing to know is that you can deduct transportation expenses if the primary purpose of your trip is for business. It will be hard to justify expensing your airfare for a 7-day trip to the Florida Keys when you only have one day of meetings.
As a general rule of thumb, you should count up the number of business and personal days in your planned trip; the majority of days must be for business activities. Keep in mind that your travel days can count as business activities, and so does a weekend that’s sandwiched in between workdays on Friday and Monday.
So if you fly to Florida on a Thursday, have a meeting on Friday, stay the weekend, meet with clients on Monday and Tuesday, and fly home Wednesday, you’ve actually accrued seven business days. This means you could spend another six days in Florida as pure vacation and still expense your transportation expenses.
You Need to Set Up Your Business Appointments Before You Leave
You can’t just take off for Hawaii with a stack of business cards and hope you can drum up some business while you’re there. The IRS requires that you establish “prior set business purpose.” In other words, you’ve got to have at least one business appointment scheduled before you leave. Otherwise, you won’t be able to expense anything.
Which Expenses Are Deductible?
Certainly, your transportation costs (like airfare, taxis, airport parking) constitute a large part of any trip, and you’re able to fully expense these costs as long as you meet the criteria set in the first two points. But there are other allowable expenses that can add up too. IRS Pub 463 lays out all the details, but here are a few things to know:
- For every day that’s considered business, you are able to deduct 100 percent of your lodging, tips, and car rentals. So, if your entire trip to Florida includes seven days of business and five extra personal days, you will be able to deduct your hotel bill for those business days (but not for the extra vacation days).
- For every day that’s considered business, you can deduct 50 percent of your food costs.
- You can also deduct other travel-related expenses that are “ordinary and necessary” (for example, baggage fees or dry cleaning).
- You cannot deduct travel expenses for your family.
Conferences and Conventions
You are able to expense your travel to a convention as long as you can prove it’s directly related to your trade or profession. In addition, the IRS also considers the location of your conference or convention. For example, did you really need to attend that conference in Fiji when there was a similar one held in Duluth?
If you are considering attending or expensing travel to a conference (particularly one outside of North America/the Caribbean), you should speak with a tax advisor or take a close look at the rules outlined in Pub 463.
Keep Documentation and Receipts
You don’t have to worry about keeping a pocketful of receipts while you are away — the IRS doesn’t require receipts for a travel expense that’s under $75. However, just because you don’t need the actual receipt doesn’t mean you are off the hook for record-keeping. You still need to document all deductible expenses, including what you purchased, how much you purchased it for, and when.
Also, keep in mind that you need to save receipts for any lodging expense, no matter the cost. So, even if you happened to stay at a hotel that was under $75 for the night, you’ll still need a copy of the receipt in order to expense it.
As with any tax strategy, the best way to avoid trouble is to be honest about your intentions, deduct only the expenses you’re entitled to, and then keep all supporting documentation to back up those deductions. Penalties are serious if you can’t substantiate your claim; for example, you can end up losing that deduction and have to pay the additional tax, in addition to interest and penalties. More important, it could cause the IRS to look closer into the rest of your tax return.
Bottom line: don’t push the rules, but there’s no reason you can’t tack on a few extra days of fun when you are traveling for business.