Guest post by Dawn Cook.
Are you taking “business vacations” or just “personal vacations”?
This tax tip post will teach you the ways you can create “business vacations” that give you valuable tax deductions.
I feel the rules generate much tax savings and the rules also provide specific steps/tasks to make sure you get the benefit of those rules.
As usual, I have to start with my disclaimer: These tax tips are based only on US tax law and as I am no longer a practicing tax professional, I insist that you consult a professional tax adviser before you begin to utilize the steps I have included here in this post. Especially for my great world-wide readers, consult your tax adviser to learn if my tips here apply in some form in your country and/or state.
Here’s my usual upfront video but it’s not an overview video this time so be sure we read the post in full:
This tax benefit of deductible business vacations is afforded to us in great deal because we have a home-based business. Our customers, clients and prospects don’t often come to our home business office so we have to go to them and they can be anywhere in the United States or in any other country for that matter. (Another disclaimer – my tax tip here applies only to travel in the United States. There are special rules related to international travel that I have not included in this post. Again, consult your tax professional.) For us, as US home based business owners, this means that wherever we travel in the US and when we follow the established rules (to be explained below), we can be sure that the travel is “business travel” with the related tax deductions.
Once the trip qualifies as “business travel”, reasonable business-travel expenses become tax deductible. And catch this – this is true even if the trip is combined with a personal or a family vacation!
As you are probably already thinking, specific expenses related to the personal portion of the trip are not tax deductible,
But if you’ve met certain requirements (to be explained below) for your combination business/personal travel, you can take the following deductions:
- 100% of your transportation is tax deductible regardless if you travel first class or by any method of transit as long as it wouldn’t be consider “lavish” or “extravagant” considering the specific facts and circumstances
- 100% of lodging, taxi fares, car rentals and tips are tax deductible and
- 50% of your meals during “business days” (to be defined later) is also tax deductible
The IRS requirements come in two forms:
First is the “IRS’s 3-Part Test”:
Part 1 – The travel must be usual and customary within your type of business
Part 2 – The travel must be conducted with the intent to obtain a direct business benefit
Part 3 – The travel must be appropriate and helpful to developing and maintaining your business
Parts 1, 2 and 3 are not either/or alternatives. All must be met including the next requirement plus more in this post.
Note: Claiming “everyone is a prospect” doesn’t make the trip qualify as deductible business travel.
The second form of requirement by IRS is the “51%/49% Transportation Rule”:
In other words, the trip must be primarily (51% or more) to conduct business activity, but note the fairly high percentage of personal purposes that can be included for the trip to still qualify by meeting all the requirements. The method that proves that 51% or more of the trip is for business activity is to prove that more than 1/2 of your days away qualify as “business days”.
Ok, now its time to define “business days” since once you know this definition, the calculation is so easy to determine if your trip qualifies under this requirement.
“Business days” are the following:
(Again the 3-Part test and the 51%/49% transportation test must be met)
1) travel days, the day you travel to and the day you return from your business destination making each of those whole days “business days”
2) days on which your time spent on business activities is more than four hours making that whole day a “business day”
AND 3) any day where you go to “pre-scheduled business appointment” (yes, a definition of “pre-scheduled business appointment” is coming next, which is very good so we can know for sure if this day becomes a definite “business day”.)
Very beneficial note in regards to food and lodging expenses for “business days” (because you’ve met the above definition of a “business day” for that day) even if your trip does not include enough “business days” to meet the 51%/49% rule: the meals and hotel costs for those specific “business days” are deductible, but you may not take a deduction for any of the transportation costs for that trip. So you’re not totally out of deductions if your “business days” don’t make up 51% of your trip.
Definition of “Pre-Scheduled Business Appointments” to create deductible “business days”:
“Pre-scheduled business appointments” must meet the following standards:
First, we have a definition for “pre-scheduled” as well as a separate definition for “business appointment”, and again definitions make it easy for us to determine if our situation meets the definitions.
“Pre-scheduled” as you guessed, means you made arrangements before you left, an easy yes or no here.
“Business appointment” is any meeting or activity that is customary considered “business” for your industry or business category, not likely too much gray area here.
Now that we have the definition of a “pre-scheduled busness appointment, we are well on our way to use a “pre-scheduled business appointment” to make that whole day a “business day” regardless of how much or how little time the “pre-scheduled business appointment” takes. I love that the pre-scheduled time can be as little as an hour, but that makes the whole day qualify…
In order for your “pre-scheduled business appointment” to qualify, you must do all three steps below:
Step 1) Schedule it in advance
Some proof is required here and a little explanation of that proof if it is an appointment personally devised by you rather than by your company. If you have devised the appointment yourself, write an email to the person you are meeting thanking them for agreeing to meet with you at the date, time and place to talk about the specific business purpose. The bolded words are the proof that is required. Print a copy of the email sent and that is your proof that the “business appointment” was “pre-scheduled”.
Step 2) Attend the appointment or activity
No explanation needed here
Step 3) Prove that you attended
And the prove isn’t hard to do and again email can be used for a personally devised appointment. After the appointment, send an email to the person you met with to thank them for meeting with you and mention some specific business benefit you received from the meeting with them. Then again, print a copy of the email sent, attach it to the email from Step 1) and these two emails prove the business appointment was pre-scheduled and you attended it. The result, that day is now a documented “business day”.
So now I have hopefully made it clear how to determine which of the days on your trip qualify as “business days” and then you can do the quick calculation (business days divided by total days) to see if the business portion of the trip reaches or exceeds 51%. First off though, I do recommend that you know for sure that your trip meets all parts of the 3-Part Test since both requirements apply fully.
I have one more great part of these travel deduction rules to relay that shows the IRS is often pretty good to home-based business owners like us and then I’ll be done for this post.
There are a few more important tips related to claiming business travel deductions like:
-Per Diem rates
-Rules when taking your spouse
-No deduction for seminars or meetings on cruise ships, with two powerful exceptions
-The strict, but easy, rules for keeping accurate business-trip records
This additional information will be coming your way soon!
In the meantime, if you were wondering if a weekend day or a holiday could be considered a “business day” that will make it easier for you to hit the 51%/49% test, here’s your answer and it reflects that the IRS supports small business owners.
If weekend days and/or holidays fall between “business days”, then those days are considered “business days too”! That’s it with just one test: If it would not be practical for you to return home for the weekend because of expense or time required, that cinches the deal and the weekend and holiday is considered a “business day”. This also works if the only reason you stayed over on Saturday night was to benefit from the discounted air fare. The requirement in this case is to show that the amount of money you saved on air fare exceeded the amount of money you spent by staying over. Of course, you must do this calculation before you book your return air ticket in case the savings isn’t enough to turn those extra days into “business days”. Then you’ll be able to make a decision that gives you the best tax advantage or at least know the results of your actions.
Alright, there’s a good share of the rules that apply when it comes to turning your trips into deductible business travel with more to come in the next post. I hope this post was written in a way that makes sense to you so that you can say “I now have some base tax knowledge on deductible business travel and it will be my starting point for acquiring my full knowledge in this area. My goal now is for most-to-all of my trips to qualify as deductible business travel! Also I’ll share my new knowledge with all my friends and colleagues.”
Committed to Your Success!
DISCLAIMER: Dawn Cook is not a tax professional or tax attorney. Therefore you must consult with a tax professional before implementing any tax strategy.
See all the posts in this mini-series:
- Taxes – You Must Be Your Own Expert Whether You Like It or Not!
- Tax Tip – How to Use Your Business Expenses to Increase Your W-2 Paycheck
- Tax Tip – How to Save Taxes by Hiring Your Kids
- Tax Tip – How to Make your Trips Qualify as Deductible Business Trips
- Tax Tip – Business Travel – Make It Deductible with Accurate Record-Keeping!
- Tax Tip – More on Deductible Business Travel