Now that spring has fully sprung, you may be planning a summer vacation sometime over the next few months. If you are self-employed or own a small business, you may want to consider combining your vacation with a business trip: there’s a chance that you could realize some tax benefits and lower the cost of your vacation by doing so.
Lower Your Vacation Costs
The key to enjoying tax and financial benefits from a summer vacation is to ensure that the primary purpose of your trip is business related. What does this mean practically? You must travel away from your regular place of business for longer than one workday and schedule at least one business-related appointment before leaving on your trip.
According to the IRS, you must establish a “prior set business purpose” in order for the trip to be considered business related. If you do, any “reasonable and necessary” travel expenses related to your business will generally be tax deductible.
The following types of expenses are usually considered by the IRS to be “ordinary and necessary,” and thus, tax deductible:
- Airfare, rail fare, mileage and taxis or ride-sharing services
- Car rentals or similar expenses for vehicle usage
- Lodging costs such as hotel rooms, condos or Airbnb rentals
- Meals and other food and beverage expenses (up to 50 percent)
- Baggage handling fees and tips
- Laundry, dry cleaning and personal grooming expenses
It’s important to keep in mind that you typically can’t deduct expenses for meals or travel that are “extravagant” based on the location of your business trip. This doesn’t mean you have to opt for the cheapest lodging or eat at the least expensive restaurants; it simply means that only expenses that ordinary and necessary for your business are deductible. While a good filet mignon could be included in the list of deductible meals, the IRS might have a hard time allowing a deduction for a bottle of Lafite-Rothschild Bordeaux (roughly $6,000 per bottle) to accompany your steak.
Maximize Your Benefits
Careful planning is essential to maximizing the tax benefits of combining a business trip with vacation. When you are planning your trip, it’s important to know that travel days can be counted as business days, as can weekends and holidays that fall between business meetings and appointments.
For example, one way to maximize potential benefits would be to leave home on a Thursday for meetings that are scheduled on that Friday and the following Monday. This would enable you to write off all of your “ordinary and necessary” travel expenses incurred from Thursday through Monday while using the weekend to enjoy some vacation time.
In this scenario, if you wanted to extend your trip beyond your meeting on Monday, you wouldn’t be able to deduct expenses on any of these post-meeting days. However, your transportation costs (in getting to and from your travel destination) would still be deductible.
Keep in mind that you can only deduct expenses that you incur personally, not expenses incurred by your family members. For example, while your family might be flying to the same destination, the only air fare that is tax-deductible is yours. There is one exception: if you’re able to drive to your destination, all of the travel mileage is deductible, even if your family members are traveling in the car with you.
The same rule applies to meals – you can deduct 50% of your meals, but not meals consumed by your family members.
It’s important to note that these rules are only for travel within the United States. If you’re travelling overseas, there are different rules for deducting expenses — consult IRS Publication 463 for more details.
Documentation is Critical
Finally, be sure to carefully document all trip expenses to make it easier to distinguish between your business and personal expenses when it comes time to file your taxes. The IRS doesn’t require receipts for expenses other than lodging that are less than $75, but it’s usually a good idea to keep them anyway to make your life easier come tax time.
While combining business trips and vacations can be a great way to save on travel costs, the details of what is tax deductible and what isn’t can get complicated, so it’s best to speak with a tax advisor about your particular situation. Here’s to hoping your summer vacations will be even more enjoyable with some added tax benefits!
To learn more about taxes and how they fit into your life (not just in terms of vacations!), download Personal Capital’s free 2018 Tax Guide for Holistic Financial Planning.
Disclaimer: The information and content provided herein is general in nature and is for informational purposes only. It is not intended and should not be construed as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax advisors or other professional to help answer questions about specific situations or needs prior to taking action based on this information. Tax laws and authorities are subject to change, either prospectively or retroactively, and any subsequent change could have a material impact on your situation. To comply with U.S. Treasury Regulations, in particular IRS Circular 230, we also inform you that, unless expressly stated otherwise, the information contained in this communication is not intended to and cannot be used to avoid IRS penalties, and is provided to support the marketing of our services.
Brian Wainscoat, CPA
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