Is Your Summer Vacation a Tax Write-Off?
Uncle Sam loves money. Uncle Sam loves money so much that he’s willing to give you a tax deduction to help you make even more, so he can collect a little extra in taxes. You can use this to your advantage because you can deduct any “ordinary and necessary expenses” related to the pursuit of business, including trips. The “ordinary and necessary” part is and has always been a little fuzzy because it’s different for each industry. The basic idea is that if it’s common and appropriate for your type of business, then it’s acceptable.
What this also means is that you can mix a little business with pleasure to get a little discount on your tax bill. You can add a few days of sight seeing to the end of your business trip. You could have your spouse join you on the road and he or she can get a free room (in the event they don’t charge more for double occupancy) while you work. You won’t be able to deduct their expenses, but you get a little help with your own.
In order to deduct your trip, it has to be primarily for business. You can include a few days of “pleasure” in your business trip but the primary reason for the trip should be business if you want to deduct it. In general, if you have more days of “business” than “pleasure” on a particular trip, then you’re safe.
What Is Tax Deductible?
The general rule is anything that is related to your business and considered “ordinary and necessary.” You can usually include transportation such as airfare, lodging such as hotel stays, and meals and entertainment. If there are conferences, seminars, or workshops related to your business you check out while on your trip, those can be included as a potential write-off as well.
Transportation Costs: If the trip is considered a business trip, the entire cost of transportation is deductible. This includes airfare or train tickets as well as car rental and taxi rides if you need it. If you travel by personal car, you can deduct business mileage which is 50 cents a mile. You can also opt to deduct actual expenses but I find using the 50 cents a mile figure is easier.
If you use a frequent flyer award for the flight, you do not get to deduct the cost of the flight.
Lodging: When deducting lodging costs, you can only deduct the days when business is conducted. If you have a five-day trip and only conduct business for three of those days, you cannot deduct the other two. There are exceptions to this rule, such as if you adjusted your travel to get cheaper airfare, then you can deduct the cost of the extra nights stay, but the general rule is business day, deductible stay.
Meals & Entertainment: Business meals and entertainment are deductible at 50% of the total cost. If you spend $10 on a meal, you’re able to deduct only $5 for tax purposes, though you need to keep the entire receipt.
How do these rules change if you bring your family along? First, you can’t deduct any of their expenses. The general rule is that you can deduct everything you would normally have spent money on. With a hotel room, you can deduct the base rate but not the amount for additional guests (which may be nominal). For a car rental, you generally don’t pay per person so you can deduct the entire cost of the rental.
How Much Will You Save?
It depends on your business structure and your tax bracket. If your corporate structure is a pass through entity like a sole proprietorship or a limited liability company, then it’s your personal tax rate.
A Real Life Example
Here’s a real life example from my own life. This summer I’ll be spending a week in Lake Tahoe on vacation with my wife. For three days before the trip, I’ll be flying to San Diego for several business meetings. From there I will fly to Reno, then drive to Lake Tahoe where I will spend a week enjoying some strenuous hiking and the gorgeous views. Afterwards, we’ll fly back to lovely Baltimore. According to my business accountant, I will be able to deduct the flight to San Diego, all lodging and meals in San Diego, and the flight from Reno to Baltimore. The flight from San Diego to Reno and expenses in Lake Tahoe are not eligible.
So, I get a cheaper (tax free) flight out to the West Coast and a cheaper flight back home from Tahoe, but the San Diego to Reno leg is on my own dime. All in all, it’s not a good way to mix some business with pleasure without annoying the missus.