As the temperatures start to rise and we start to enjoy some beautiful spring weather with hints of summer close by, many families are starting to plan summer vacations to a warm getaway.
As a business owner you may be wondering, is there a legitimate way for me to deduct a vacation? What about general business travel – what exactly can you deduct when traveling out of town?
I hope this blog post helps clarify some of those questions, and may even pleasantly surprise you with what’s possible.
The first general principle to keep in mind is that business travel falls under the broader business expense guidelines of ‘ordinary and necessary’. In other words, your reason for travel and for incurring the expenses must be ordinary and necessary for your type of business. A bookkeeper probably has a tough time justifying a $5,000 expense to take scuba diving lessons in Costa Rica. But if you’re a self employed scuba instructor, you surely have legitimate reasons to travel to all sorts of exotic locations to train yourself and/or your team, or to scout out locations to provide trips to your clientele. So remember, ‘ordinary and necessary’ can vary tremendously depending on your industry.
Now let’s get into some of the nitty gritty details.
First, keep in mind that there are two general types of tax-deductible business travel costs:
- Transportation Costs
- Business-day Costs
If you’re traveling within the United States (NOT including US territories and possessions, such as the Virgin Islands) for business purposes (for example, to meet a client in a different state, to attend a conference or seminar, to perform market research etc.), the majority (51%) of your trip days need to be ‘business days’ as opposed to personal. See the ‘Business-Day Costs’ section below for details on what counts as a business day.
So if you fly from Pittsburgh to Miami on a Monday, spend Tuesday and Wednesday in business meetings 4+ hours each day, enjoy Thursday at the beach and fly back home Friday, you’ve spent 3 out of 4 days (75%) as business days, and therefore you can deduct the full cost of your flights, as well as the costs of lodging and meals on the 4 business days. You can’t deduct the lodging and meals for the one personal day. Note that for this 51/49 test, the departure day is excluded, but the return day does count (therefore the trip from Monday-Friday was 4 total days, of which 3 days were business). If you’re wondering, there’s nothing wrong with flying first class or staying at a five star hotel. These are all considered ordinary and necessary business expenses.
It’s important to note that for domestic travel, it’s an all or nothing deduction. If you don’t meet the 51% threshold of business days, you can’t deduct any of your expenses getting to or from the location – although you CAN still deduct bona fide business-day expenses (see below) incurred on your trip, such as Ubers, parking, and business meals with clients.
Now for the fun part: International travel.
If you travel to an international destination for business purposes, for the best results, keep the trip to seven days or less (excluding the departure day, but including the return day). In such a case, all you need is one of the seven days to be spent on business activities and you can fully deduct the transportation to and from the foreign country. For example, you depart New York for Costa Rica on a Monday. You spend Tuesday in a full-day business meeting. You then enjoy Wednesday through Sunday on the beach, snorkeling and touring the jungle and fly back on Monday. Your trip is considered seven days, of which only one was a business day. You still get to deduct the full cost of your transportation to and from Costa Rica.
If your international trip is for more than seven days, then you are subject to the 76/24 test, in which you need to spend at least 76% of the days on business in order to fully deduct the cost of transportation. For the 76/24 test, the day of departure does count as one of the days. If you don’t meet the 76% requirement, you can still deduct the pro-rated business percentage of the transportation (for example, if you spend 40% of the days on business, you deduct 40% of the transportation costs).
Special rules apply when traveling for the purpose of attending a convention, seminar or similar meeting. The IRS divides the world into two broad categories: Inside the North American Area and Outside the North American Area. You may be surprised by which countries fall into the ‘North American Area’. See here for a breakdown of these areas (hint: most of the Caribbean and many Central American countries count!). As you might have guessed, if your convention or seminar is inside the North American Area, it’s much easier to deduct the transportation costs. The only requirement you need to satisfy is that the convention/seminar benefits or advances the interests of your business.
However, if the convention/seminar is outside the North American Area, in order for you to deduct the transportation costs the event must be directly related to the active conduct of your business, and you must prove that it is as reasonable for the event to be held outside the North American Area as within it. This is a much harder standard to meet, although it’s not impossible.
When traveling overnight to a business location, you generally get to deduct the costs of sustaining life while at the business destination as long as the day is considered a business day. These costs include things like meals and snacks, drinks, lodging, transportation, dry cleaning/laundry, phone/internet/communication costs, tips to bellmen/maids etc.
A day can be considered a business day by meeting any of the following circumstances:
- Your physical presence is required for a specific business purpose (for example, to sign a contract in person). Even if that purpose only lasts for a few minutes, if your presence was required, the whole day counts as a business day.
- The day is spent primarily on business activities (your principal activity is the pursuit of business). Assuming the average person works 8 hours per day, you just need to spend roughly 4+ hours of a day on business matters for the day to count.
- Weekends, Holidays, Standby Days. If you have a business meeting, convention or other activity in the pursuit of business that is interrupted by the weekend or a holiday, the weekend or holiday days count as well. For example, you schedule business meetings on Friday and Monday. The intermediate Saturday and Sunday count as business days as well, even if they are spent entirely on the beach.
If the day is a business day, you get to deduct the life sustaining expenses incurred on that day. If the day is a personal day, you won’t get to deduct any of those expenses (but you do still get to deduct bona fide business expenses incurred on those days, such as parking or a business meal).
As you can see, whether or not a day is considered a business-day is quite important. As outlined above, there are two tax-deduction related outcomes:
- How much, if any, of the transportation to and from the destination can be deducted.
- What life-sustaining expenses can be deducted while at the destination.
Be sure to discuss your business travel plans with your accountant before booking tickets, so that you can maximize your deductions – and your fun!