Don't get me wrong. I love vacations. I just don't find the time to take as many of them as I would like.
But if you travel for business and enjoy vacations, you might be in luck. You may be able to combine them both and take a tax deduction. But you need to plan your trip carefully, so you don't get in trouble.
The IRS has strict rules when it comes to deducting travel expenses. You are allowed to deduct travel (including flights, rental vehicles, taxi services, public transit, etc.), lodging and meals (limited to 50 percent of your total cost) for a qualifying business trip. But the key is that it has to be for a qualifying business trip and not personal travel.
So how do you enjoy some personal leisure time and still qualify for a tax deduction? Just follow these three simple rules are you are in great shape.
For a business trip to be tax deductible, the IRS requires that more than half of your trip be business-related. The IRS looks at the number of business related travel days compared to total travel days. This is where you can mix in some vacation time and still meet the requirements.
The good news is that the IRS is generous when it considers business days. In fact, the IRS considers any of the following a business day:
- Any day in which you have at least one meeting, event, etc.
- Weekends so long as you have business activities on Friday and again on Monday.
- Any day in which you are traveling.
For example, let's assume that you take a flight from Phoenix to Vancouver, Canada on Thursday morning for a business meeting on Friday. You arrive mid-day and spend the afternoon sightseeing. You stay the weekend and enjoy some personal time with some friends. You then have a follow-up business meeting on Monday morning and spend the afternoon doing more sightseeing. You get up Tuesday morning and spend the majority of your day with friends before catching a flight home in the evening.
Since Thursday and the following Tuesday are travel days, those days qualify as business days. You have a meeting on Friday and Monday, so those days qualify as well. Since you have a weekend in between the business meetings, both Saturday and Sunday qualify as business days as well. This is true even if you use the weekend for visiting friends or family, sightseeing, or other personal activities.
Since all six of your travel days are considered business days, you can deduct all of your travel and lodging expenses and likely a good portion of your meals. You cannot deduct any sightseeing, entertainment, or personal meals.
Make no mistake: you must have business intent and the primary purpose of your travel must be business. To deduct your travel expenses, you must establish a clear business purpose before you start to incur travel-related costs. This requirement means that you should plan business meetings in advance of the actual travel.
Keeping records of your established intent is critical. This may include copies of your schedule, calendar, emails or other correspondence between yourself and who you are meeting. This is consistent with not just meetings, but trade shows, conferences, etc.
For business-related trips, the IRS requires receipts for all lodging expenses, as well as any payments over the amount of $75 for meals, local travel and incidentals. Items that cost less than $75 should still be documented in some form to audit-proof your records. Your written records should cover dates, locations, costs, and business reasons for incurring each expense.
So if you are planning on taking a vacation, see if you can make it tax deductible. It might be easier to do than you think. If you follow the rules, you may have some nice travels ahead.