Combining vacation with business? You can probably still deduct a lot of your expenses. Here's how.
We've all done it — tacked a few vacation days on to the end of a boring business trip. And why not? It's one of the few perks of spending time on the road. But what if you're self-employed and the only one picking up the bill is you? Well, you can still combine tax savings and vacation into the same trip. Consider yourself reimbursed by Uncle Sam.
Deducting Domestic Trips
As you might expect, when vacation is the main reason for travel, you can't deduct any transportation expenses. On the other hand, if the primary reason for the trip is business, Internal Revenue Service guidelines say you can deduct 100% of your transportation costs for travel within the United States. So the trick here is to make business the principal purpose of your trip and then mix in some vacation days. Do this correctly and you can deduct all of your transportation costs.
What might that include? Getting to and from the airport, your airfare, cabs to and from your hotel to your business meetings and even the tips you give to the porters to check-in your bags. You can also deduct 50% your business meals. Of course, you don't have to fly to get tax write-offs. The cost of traveling to your business destination and back by rail or car will fall under the same rules. The only thing that generally isn't deductible is your out-of-pocket expenses for personal days, although there's a handy way around this if you stay over a Saturday night, which will be addressed below.
So how do you prove a domestic trip is primarily for business? Good question. The critical factor is the time you spend on business vs. fun and games. Beyond that, the IRS doesn't supply any specific guidelines, so we have to look for clues in the rules regarding travel abroad. Here the IRS says you can count travel days as business days. Ditto for weekends and holidays — that is, providing they fall between business days and it would be impractical to return home. You can also count "standby days," i.e., days when your physical presence is required, whether or not you are actually called upon to work. (These could be days when your client asks you to stick around, but she isn't 100% sure she's going to need you.) Any other day when your time during normal working hours is mainly devoted to business activities also counts as a business day.
Bottom line? As long as you have more business days than personal days, you can claim your trip was mainly for business with a straight face.
Stay Saturday Night and Deduct Even More
If staying over a Saturday night substantially reduces your airfare and thus the overall cost of your business trip, the IRS has a deal you can't beat. Based on a recent IRS ruling, you can deduct all of your transportation expenses, all out-of-pocket expenses for your business days and all of your out-of-pocket expenses for staying the extra Saturday and following days — even though you just goof off on those extra days. In effect, the extra days count as business days, because staying over actually saves money.
Naturally, you still must have a dominant business purpose for making the trip in the first place. And as always, you can only deduct 50% of your meal expenses.
Client or Employer Reimbursements
When your client reimburses you for travel expenses that you could have otherwise deducted under the preceding rules, the payment to you is generally tax-free, and obviously then not deductible. Ditto if you're an employee. To get tax-free treatment, however, you must supply your client (or employer) with an "adequate accounting." That means an expense report, travel-reimbursement request or detailed itemized billing on your invoice.
Self-employed people can deduct any unreimbursed business-related travel costs on Schedule C, subject to the 50% rule for unreimbursed meals and entertainment. Employees, however, must treat unreimbursed business-travel expenses as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income floor. That rule precludes any actual write-offs for most employees.
Deducting Trips Abroad
If you take some personal time on a foreign business trip, the general rule says you must allocate all your travel expenses — including transportation — between your business and personal time. This is known as the "allocation rule." Often times, however, this rule is easily avoided: With a little planning, you can take advantage of two gaping loopholes and thereby deduct 100% of your transportation expenses.
First, there's the "one-week loophole." If your foreign business trip lasts one week or less, you can automatically deduct all your transportation costs (plane fare, cabs to and from airports, etc.). This is true even if you actually spend most of your time vacationing. In figuring the length of your trip, don't count the day you leave, but do count the day you return.
Of course, you can also deduct out-of-pocket daily living expenses (hotels, cabs, tips, 50% of meals, etc.) for all your business days. Needless to say, you can't deduct daily living costs for vacation days.
As explained earlier, the definition of "business day" is pretty liberal. To wit: Weekends and holidays falling between business days count as business days. So do intervening weekdays between business days and standby days. Finally, you get to count days when you intended to work but couldn't for reasons beyond your control (e.g., transportation difficulties or the party you were supposed to meet falling ill).
What if your foreign business trip lasts more than a week? Not a problem. Just plan ahead to take advantage of the 25% loophole. If you qualify, you can once again deduct all your transportation costs and all of your daily out-of-pocket living expenses for business days. The trick here is to make sure you spend less than 25% of your total days vacationing. Count your day of departure and day of return as business days. Ditto for all the other types of business days listed earlier under the one-week loophole.
Help! I Can't Use Those Loopholes!
Relax. Even if you're stuck using the allocation rule, you should still get a nice tax break by deducting the business percentage of your transportation costs. (Again, this is assuming the primary reason for the trip is business.) To figure the percentage, simply divide the days spent principally on business by your total days outside the country, including travel days. Travel days count as business days, along with all the other kinds of days covered above. And as always, you can write off your out-of-pocket daily living expenses for the business days.
And keep in mind, the allocation rule doesn't apply to travel legs that begin and end on U.S. soil. For example, say you fly from Baltimore to Hong Kong. You have to change planes in San Francisco both ways. So even if you don't qualify for either the one-week loophole or the 25% loophole, you can still deduct 100% of the cost of the outbound leg from Baltimore to San Francisco and 100% of the leg from San Francisco back to Baltimore. The allocation rule applies to the remainder of your airfare (the legs between San Francisco and Hong Kong).
If the reason for a business trip outside North America is to attend a convention directly related to your trade or business, you must follow all the preceding foreign travel rules. Plus you must also show it was just as reasonable for the meeting to be held in the foreign location instead of in North America. If this is truly an international convention with attendees coming from several countries, this shouldn't be a problem. If, however, this is pure boondoggle (i.e., there's no reason that the conference was held in Spain other than that it's a lovely destination), you're out of luck. In that case, your deductions are limited to the convention registration fees and other costs directly related to any business conducted during your trip.