Tim, who owns his
own business, decided he wanted to take a two-week trip around the US. So he
did--and was able to legally deduct every dime that he spent on his
"vacation". Here's how he did it.
1. Make all your business appointments before you leave for
your trip.
Most people believe
that they can go on vacation and simply hand out their business cards in
order to make the trip deductible.
Wrong.
You must have at
least one business appointment before you leave in order to establish the
"prior set business purpose" required by the IRS. Keeping this in
mind, before he left for his trip, Tim set up appointments with business
colleagues in the various cities that he planned to visit.
Let's say Tim is a
manufacturer of green office products looking to expand his business and
distribute more product. One possible way to establish business contacts--if
he doesn't already have them--is to place advertisements looking for
distributors in newspapers in each location he plans to visit. He could then
interview those who respond when he gets to the business destination.
Example: Tim wants to
vacation in Hawaii. If he places several advertisements for distributors, or
contacts some of his downline distributors to perform a presentation, then
the IRS would accept his trip for business.
Tip: It would be vital
for Tim to document this business purpose by keeping a copy of the
advertisement and all correspondence along with noting what appointments he
will have in his diary.
2. Make Sure your Trip is All "Business Travel."
In order to deduct
all of your on-the-road business expenses, you must be traveling on business.
The IRS states that travel expenses are 100% deductible as long as your trip
is business related and you are traveling away from your regular place of
business longer than an ordinary day's work
and you need to sleep or
rest to meet the demands of your work while away from home.
Example: Tim wanted to go to
a regional meeting in Boston, which is only a one-hour drive from his home.
If he were to sleep in the hotel where the meeting will be held (in order to
avoid possible automobile and traffic problems), his overnight stay qualifies
as business travel in the eyes of the IRS.
Tip: Remember: You don't
need to live far away to be on business travel. If you have a good reason for
sleeping at your destination, you could live a couple of miles away and still
be on travel status.
3. Make sure that you deduct all of your on-the-road -expenses
for each day you're away.
For every day you
are on business travel, you can deduct 100% of lodging, tips, car rentals,
and 50% of your food. Tim spends three days meeting with potential
distributors. If he spends $50 a day for food, he can deduct 50% of this
amount, or $25.
Tip:The IRS doesn't
require receipts for travel expense under $75 per expense--except for
lodging.
Example: If Tim pays $6 for
drinks an the plane, $6.95 for breakfast, $12.00 for lunch, $50 for dinner,
he does not need receipts for anything since each item was under $75.
Tip: He would, however,
need to document these items in your diary. A good tax diary is essential in
order to audit-proof your records. Adequate documentation shall consist of
amount, date, place and business reason for the expense.
Example: If, however, Tim
stays in the Bates Motel and spends $22 on lodging, will he need a receipt?
The answer is yes. You need receipts for all paid lodging.
Tip: Not only are your
on-the-road expenses deductible from your trip, but also all laundry, shoe
shines, manicures, and dry-cleaning costs for clothes worn on the trip. Thus,
your first dry cleaning bill that you incur when you get home will be fully
deductible. Make sure that you keep the dry cleaning receipt and have your
clothing dry cleaned within a day or two of getting home.
4. Sandwich weekends between business days.
If you have a
business day on Friday and another one on Monday, you can deduct all
on-the-road expenses during the weekend.
Example: Tim makes business
appointments in Florida on Friday and one on the following Monday. Even
though he has no business on Saturday and Sunday, he may deduct on-the-road
business expenses incurred during the weekend.
5. Make the majority of your trip days business days.
The IRS says that
you can deduct transportation expenses if business is the primary purpose of
the trip. A majority of days in the trip must be for business activities,
otherwise, you cannot make any transportation deductions.
Example: Tim spends six days
in San Diego. He leaves early on Thursday morning. He had a seminar on Friday
and meets with distributors on Monday and flies home on Tuesday, taking the
last flight of the day home after playing a complete round of golf. How many
days are considered business days?
All of them.
Thursday is a business day, since it includes traveling - even if the rest of
the day is spent at the beach. Friday is a business day because he had a
seminar. Monday is a business day because he met with prospects and
distributors in pre-arranged appointments. Saturday and Sunday are sandwiched
between business days, so they count, and Tuesday is a travel day.
Since Tim accrued
six business days, he could spend another five days having fun and still deduct
all his transportation to San Diego. The reason is that the majority of the
days were business days (six out of eleven). However, he can only deduct six
days worth of lodging, dry cleaning, shoe shines, and tips. The important
point is that Tim would be spending money on lodging, airfare, and food, but
now most of his expenses will become deductible.
Consult us before
you plan your next trip. We'll show you the right way to legally deduct your
vacation when you combine it with business. Bon Voyage!
This article was written by Joe H. Craft CPA/PFS, CFP and reprinted from an email sent by CPA Solutions TM for Adams, Ewing & Craft, LLLP with Bridgeway Financial Corporation. For more information, you can visit www.bridgewaycorp.com or call (206) 501-3868.
Flickr photo courtesy of Giorgio Montersino
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