The end of the year is a big time for businesses. In Q4, you’ll need to get your taxes in order, so you can enjoy the holiday and also prepare for the New Year. The question remains, how much of it can be written off and what are the rules one must play by? Understanding how tax deductions work for holiday travel is a serious matter and can save you from potentially being audited.
Traveling over holidays is a favorable tax write-off but not if you’re going to visit friends and relatives. However, traveling around to visit top clients and talk business, deliver gifts, discuss pain points and needs for the New Year, or just to check in, can all be written off.
This may sound like it’s against the law, but: as a business owner, you can write off certain vacation costs on your tax return. If you strategically add vacation time to a regular business trip, you can legally enjoy some hard-earned down time and save on your tax bill.
Business Travelers Beware:
The IRS is particularly keen on watching your expenses. The IRS looks closely at business travel expenses, because there is so much grey area and room for manipulation. The most common method is grouping personal travel expenses with business travel expenses.
It is estimated that 2 out of 3 business travelers add vacation days to at least one business trip each year. If you’re bringing the family, it’s important to understand the dos and don’ts of tax deductions when it comes to business travel.
In order for you to deduct travel expenses, you must be away from your “tax home” long enough to require you to sleep or rest. Your tax home is generally the city or general area in which you live and work.
In order to deduct travel expenses, your trip must be primarily for business reasons, meaning that more than 50% of the days you spend on your trip must be “business days,” which is defined as any day in which you spend at least 4 hours working on your business (including travel time itself).
You can deduct all of your qualifying travel expenses during each business day, as long as 4 of the 24 hours away involve business. Of course, the more aggressively you pursue deductions, the more you should seek to substantiate your business work on that day.
A possible strategy here, if you enjoy the locale you are visiting, is to extend your trip such that you only work 4 hours a day. There’s nothing wrong with enjoying business travel, but make sure you only deduct the portion of your trip that is actually for business. For example, if you stay in Las Vegas two extra nights for leisure without doing business, you can’t deduct the hotel room and other expenses for those two days.
Weekends are considered “rest days,” and you may still count them as business days as long as the preceding Friday and following Monday were business days as defined by the 4-hour rule. The statute is that it must be less expensive for you to lodge the weekend at your location than to travel back home for the weekend and travel back to your trip location on Monday.
Tips for Deducting Travel Expenses:
- Hire a knowledgeable CPA, such as Semaphore (yes – this is shameless self-promotion).
What’s the difference between a personal and a business-related expense? The answer isn’t always easy. Hiring a tax professional who is up-to-date on IRS rules, understands your business and processes to handle not only financial statements, but for tax purposes as well will help you save in the long run.
Audits can turn “criminal” as well, and you really do not want to be charged with tax evasion. It’s so much easier to do it right form the start, so be sure you only declare legitimate expenses. You wouldn’t want to risk getting your accounts audited or leveed.
- Know the tax deduction loopholes.
Most employers are familiar with the expense rule that only 50 percent of costs of their meals are deductible. However, few realize that’s not always the case. If the meal is offered as a benefit to the public such as a conference or an event where the business is being promoted, then the cost of the meal is fully deductible by the company. However, if you go to lunch with a group of peers and you decide to spring for the bill, you can include all of the meals on the 50% deduction.
Some airlines offer discounts for traveling on a Saturday. Well known as the “Saturday night stay,” you can charge an extra night even if it’s used for personal, in the event that the total costs are cheaper than flying on a Friday.
- When traveling with others:
When deducting travel expenses, your stay and transportation are fully deductible even if your spouse tags along because you’d need a single room and transportation anyway. But if you were to take public transportation during the business travel, you would only be able to deduct your fare, while your spouse would be responsible for any transportation costs they would incur alone.
Travel expenses for someone such as a family member, spouse or a dependent accompanying you on a business trip cannot be deducted unless the person meets all three of the following criteria. (1) is your employee; (2) has a real business purpose for the travel (taking notes aren’t enough); and (3) would otherwise be allowed to deduct the travel expenses.
- Keep orderly records and label receipts.
Make sure you stay organized by retaining all receipts, recording all expenses, categorize everything and sit down with your CPA to make sure that the right expenses are being deducted.
For each trip, make sure to diligently record the date, the number of miles and the purpose of the trip. In general, you should keep records that support your deductions for 3 years from the date you filed the income tax return on which the deduction was claimed. The IRS reserves the right to go as far back as six years.
- Separate work and personal activities.
If your trip is partially business and partially personal, the amount you can deduct will depend on how much time you actually spend on business. Everyone is held responsible for the portions of their trip that are not business related.
Examples of Deductible Travel Expenses:
- Travel by airplane, train, bus or car between your home and business destination.
- Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and work location, and from one customer to another, or from one place of business to another. Keep in mind, you’ll have trouble writing off the cost of a Range Rover if a Toyota Camry will get you there just as fast.
- Shipping of baggage between your regular and temporary work locations.
- Using your car while at your business destination. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking fees. If you rent a car, you can deduct only the business-use portion for the expenses.
- Meals and lodging. Keep in mind it may get a little suspicious if your write-off meals have a pattern of including filet mignon and a $300 bottle of expensive wine.
- Dry cleaning and laundry.
- Business calls while on your business trip. (This includes business communications by fax machine or other communication devices).
- Tips you pay for services related to any of these expenses.
- Other similar ordinary and necessary expenses related to your business travel.
The IRS has very specific rules for deduction of travel expenses. If you abide by them and make sure you document the business purpose of your trip, you may be surprised at how much you can deduct.
You can’t deduct travel expenses on a trip that is primarily for personal reasons, like a vacation to the Caribbean. However, you can deduct expenses you have while at your destination that are directly related to your business. For example, if you attend a professional seminar while on vacation, you can deduct the conference fees. Keep the brochure that lists the seminar or work-related event that you attended for evidence. You need to make sure you plan the trip out in advance.
You can’t show up to a pool party, hand out business cards to everyone you meet poolside, call it “networking,” and deduct the cost of the trip from your taxes. If you already have a holiday vacation planned, check the websites of professional organizations to see if a conference will be taking place while you’re at your destination. Travel expenses for conventions are deductible if you can show that your attendance benefits your trade or business.
Penalties are serious if you can’t substantiate your claim. You could lose the deduction and end up having to pay the tax, plus interest and a penalty. If, after recalculation, it turns out you understated your tax liability by 10% or $5,000, whichever is greater, you could get slapped with a 20% understatement penalty. Ultimately, you’re paying back 120% of what you cheated off the IRS. If the IRS for whatever reasons suspects tax evasion and they start digging- it is hard to get them to stop without a thorough investigation and an audit taking place.
Foreign Travel Tax Deductions:
The rules are different when you travel outside the USA. The business trip must be primarily for business in order to claim the entire trip as a business expense. The deciding factor is usually the amount of time (not expenses) spent on business activities vs. time spent on personal activities.
Rules to count:
- Your total foreign travel days are more than 7 consecutive days.
- Your foreign travel “non-business days” are 25% or more of your total foreign travel days
- If you can show that you are either not in control of the business travel (not deciding if the travel is necessary) OR
- The main motivation of the trip was not personal
If one or both of these are the case then you avoid the foreign travel rule, and you’re back to a fully deductible business trip.
Have your business or convention meetings spread out every few days, turning your “personal days” into “business days.” Some legitimate reasons why your meetings/conventions may be spread out include:
- To allow time for brainstorming on specific business strategies
- Scheduling conflicts with key employees
- Preparation was required between successive meetings
- Clients visited were only available certain days
- Convention and other business meeting dates did not coincide
Have three or four empty seats in your car? Feel free to fill them. As long as you’re traveling for business, and renting a vehicle is a “necessary and ordinary” expense, you can still deduct your business mileage or car rental costs even when others join you for the ride. One exception: If you incur extra mileage or “unnecessary” rental costs because you bring your family along for the ride, the expense is no longer deductible because it isn’t “necessary or ordinary.”
Similar to the driving expense, you can only deduct lodging equivalent to what you would use if you were traveling alone. However, there is some flexibility. If you pay for lodging to accommodate you and your family, you can deduct the portion of lodging costs that is equivalent to what you would pay only for yourself.
If you have any questions about holiday travel deductions, contact our tax professionals at Semaphore. We would love to help you!