It is estimated that 2 out of 3 business travelers add vacation days to at least one business trip every 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.
If you take your family along and extend the holiday into a vacation, the primary purpose of the trip must be for business. “Doing some work on a family vacation does not turn vacation expenses into qualified business travel tax deductions,” warns Kathy Pickering, executive director of the Tax Institute at H&R Block. “However, bringing a companion on a business trip won’t make the business travel expenses ineligible, either. It can be deducted if the expenses claimed would have been incurred had the trip remained strictly business in the first place.”
You first need to decide whether this will be a passive or an active trip, says David Hryck, a tax lawyer in New York City. A passive trip would be a conference or course to attend while on vacation—something that improves your skills and builds knowledge within your field. An active business trip would be scheduled meetings with a vacation tacked on. It’s legal to claim expenses that would have incurred if the trip had been strictly business.
‘Remember, the IRS isn’t here to subsidize your vacation’—Abby Eisenkraft
“It’s important to note that you cannot deduct expenses for anyone who is not involved in the business side of the trip,” says Hryck. “But look for overlap—this is where you may be able to find some additional deductions. For example, if you rent a car to drive employees or clients, the transportation becomes deductible. You can use that same car to drive your family around as well.”
With regard to the IRS, all business trips must have a business purpose. You are allowed to deduct ordinary, necessary, and reasonable travel expenses, such as airfare, rental car, public transportation, parking, hotel, and 50 percent of the meal costs. The tricky part is figuring out the business portion versus the vacation costs.
“Remember, the IRS isn’t here to subsidize your vacation,” says Abby Eisenkraft, CEO of New York based Choice Tax Solutions and author of the forthcoming book 101 Ways to Stay Off the IRS Radar. “They will ask for substantiation of your business travel should you be audited because it’s an area of taxpayer fraud. I always advise my clients to have detailed itineraries, keep business cards of associates they met with, keep actual receipts (not just bank statements), and so on. If you want to win an audit, you have to be well prepared, and the time for preparation is during or shortly after the trip, not 2 years later when you receive the audit notice and you are scrambling to find these things and hoping your memory serves you well.”
As someone who has done a great deal of face-to-face audits with the IRS, Eisenkraft has seen exactly what will and will not fly if you’re audited.
Tips for Avoiding an Audit
Abby Eisenkraft offers some rules of the road:
1) Separate the cost of meals and entertainment from other expenses you incur when you travel because they have separate tax treatment. Meals have a 50 percent limit, so don’t expect the full cost of your meals to be fully tax deductible.
2) Your spouse or another individual you travel with is generally not deductible. You need to prove to the IRS that your travel companion has an actual business purpose for traveling with you. If you are able to prove that this individual plays an integral part in your business, not just entertaining clients and typing notes, you may be able to deduct those expenses.
3) Keep a log of out-of-pocket expenses, such as tips, cash taxis, and so on. They are deductible, and of course, you won’t have a receipt for many of these items. A good log will help you support this deduction should you be audited.
4) It is up to you to keep detailed records. Request copies of your hotel bill for the breakdown. The IRS does not consider a bank statement or credit card statement proper substantiation for travel because there is no breakout of expense categories.
If your trip is primarily business-related, you can deduct all of the business expenses. If you extend your trip for an extra day or two for personal reasons (i.e., to see family, go sight-seeing, and so on), the cost of your plane fare would still be deductible because you still traveled for business, but the extra night(s) and meals for the personal portion of the trip are not deductible. If you had an extra leg in your flight for a personal stopover, that particular leg would not be deductible; solely the portions that cover business-only travel would be.
If family stays with you in a hotel room, and the same room would cost no less if you were traveling on your own, then it remains deductible. If you had to pay extra for a larger room, then your allowable tax deduction is for the room cost for a single traveler.
Important caveat: when we travel outside of the U.S. (think cruise or overseas trip), the tax law gets more complicated. If the trip is entirely a business trip, all of the travel expenses can be deducted. There are certain exceptions if the trip is mostly for business, and IRS Publication 463 breaks out four exceptions on deductibility. But don’t think that the IRS will not look closely at your cruise, so if you are an “aspiring” author and take a cruise that features seminars aimed at writers, this can very well be deemed a personal expense because you are not actively working in the business, and the deduction will be disallowed. Please note the following is not a good defense: “The flyer says that it’s tax deductible.”
If you cannot support your deductions, you will owe the taxes, interest and possible penalties. There are accuracy-related penalties (can be 20 percent and 40 percent), and there can be penalties for fraud as well. And you have to pay someone like me to defend you.
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 from the start, so be sure you only declare legitimate expenses. Arm yourself with the tax law and knowledge so you do it right.
The IRS website is your best resource for this information, since they will be using this same information to process your tax return.