Can you write off your vacation?
SHERYL NANCE-NASH | 3/19/2020, 5:53 p.m.
It’s that time of year when you’re doing your tax returns. It’s possible that the wonderful trip you took this past summer or fall may be deductible. Can you legally write-off your trip? If you’re self-employed––you could be an entrepreneur, freelancer, consultant, or have an online business, for example. If so, there’s a good chance you can. You must have a company set up as a business entity, be it an S-Corp, C-Corp or LLC, for example.
Here’s what you need to know.
For starters, did your trip have a business purpose that included things like client meetings, attending a business conference, being a guest speaker at a conference, doing research and development for the business, or holding a board meeting or annual shareholders’ meeting? Did the activity have the potential to generate revenue, such as training and networking?
The second and third requirement is that the purpose is “ordinary and necessary.” Lastly, every expense must be properly documented.
Tom Wheelwright, a CPA and author of “Tax-Free Wealth,” explains what this means. “An ordinary expense means it’s typical in your business, both as to amount and to frequency and purpose. Necessary means it actually helps you increase your profits or expand your business.”
To get a deduction for travel, he says you must spend more than half your time during the business day doing business and have everything documented to meet those four tests. “So if you spend 4.5 hours a day doing business, it becomes deductible. You also must have documentation, which includes receipts, what you did, and a log of your expenses,” says Wheelwright.
On receipts, write the name of the client who you had the meal with for further proof. “Save the emailed confirmation and receipt from the hotel reservation or conference ticket payment that show the dates, times, and name of the events as well as the receipts from the travel it took to get there and back (gas stations or flights.),” says Ben Watson, founder of Fiscal Fluency, a personal finance and business coaching company.
Know too, that you must be away from home overnight, which is no biggie since you are on vacay. Why? The IRS requires an overnight stay for the trip to qualify as business travel “away from home,” explains Wheelwright.
You’re likely wondering too, about when you travel abroad. Wheelwright explains, “International travel is a little different. It’s an all-or-nothing test in the U.S., so either you spent more than 50% of your time on business, and it’s all deductible, or you spent 50% or less and none of its deductible. However, when you travel to another country, it’s a proportionate deduction. For example, if you spent 40% of your time doing business in Italy, then 40% is deductible.”
Stick to the rules
It had to have been a legitimate business trip. “You can’t simply do some work while on the beach and call it a business trip, but if you add a couple days at the beach onto your pre-planned business trip to the coast, you could still write off your lodging fees,” says Watson. If you extend your trip for vacation though, you can only deduct the expenses that were directly for the business reason. If you’re traveling to multiple cities, keep in mind that each must have a business purpose.
Work, work, work.
If you are at a conference, you must fully participate, not just go to one or two sessions. If you only attend a small number of the business-related events, the entire purpose of the trip would be considered a personal trip with “incidental” business activities, points out Watson. Remember you need to do a log of what you did, if it’s thin on details, it could prove problematic. “You don’t want to lose the ability deduct transportation, lodging, meals, and other expenses,” says Watson.
Or if it’s a business trip of your own making, be sure it includes meeting with clients, hosting meetings, or participating in some work-related activity. “To demonstrate evidence of these events, it’s wise to put calendar appointments down in your phone in advance and hold onto receipts when the time comes to file your tax return and claim your deductions. Remember, the primary purpose of this trip is for work, not a minor afterthought to think up deductible expenses,” says Riley Adams, a CPA and personal finance blogger with youngandtheinvested.com.
Don’t try to bend what “ordinary and necessary” means. “If you have the ability to accomplish the same business tasks while staying at a modest hotel as you would at the Four Seasons, you’ll have a hard time justifying the extra cost if you’re ever audited,” says Watson.
Did you stay at a place that is similar to places you normally stay on a business trip so your expenses are considered “ordinary”? “For example, if you usually stay at 5-star hotels for your business trips, then the Four Seasons would fall into the same category. However, if you usually stay at economy hotels like the Comfort Inn, and suddenly switch to a luxury hotel, a high-end venue could raise red flags with the IRS. It does not matter whether you stay at a hotel or vacation rental. The quality and expenses should be similar,” says Wheelwright.
When traveling with non-business companions, such as a spouse or family members, you may only deduct the cost of the lodging you would’ve paid if you were traveling alone (i.e., single room costs $150, paid for double room for $200––only $150 would be allowed.)
Personal meals are not deductible, but food expenses related to business can have 50% of their cost deducted. Expenses for your family’s meals and entertainment cannot be deducted, explains Adams. Unless, they are actively engaged in the business on the vacation and you can show that their expense is both ordinary and necessary, points out Wheelwright.
Also, travel expenses are only deductible on the days in which the work-related event occurs. Says Adams, “For example, a taxi ride to the meeting, train to a conference, or plane ride to the event. Lodging, much like travel expenses, is deductible on the days in which business is set to occur.”
Make smart moves
It’s best to put your “vacation” days in the middle of the business days, advises CPA Greg O’Brien. “For example, if the business owner took a seven-day trip to Florida and spent five days meeting with clients or prospects and two days relaxing on the beach, this would still qualify as a deductible business trip. The trick is the stick the ‘vacation’ days in the middle of the business days, rather than the first few days” he says.
By placing the vacation days in the middle, the travel days to and from are considered business-related, rather than personal.
Watson offers another tip, “Laundry, dry-cleaning, shoe-shine expenses are perfectly acceptable expenses if incurred shortly after returning home.”
Understand, too, that you don’t have to be a business owner to benefit on travel expenses. According to Wheelwright, you can write-off training trips if the program is considered “continuing education.”
He says, “The IRS generally thinks seminars are personal, so categorizing the training as continuing education typically works better on the tax return.”
Maybe you don’t have all the backup you need to claim your trip on your 2019 taxes––now you know what to do next time.