When you convert your vacation into a business trip, your transportation expenses suddenly become deductible.
And when you travel for business, you deduct the expenses. Think of the tax deduction as a travel discount. The size of the discount depends on your tax bracket. That could easily amount to savings of 30, 40, 50, or even 60 percent.
What kind of travel are we talking about? In general, business travel can be about as luxurious as you can dream up! For example, all of the following can qualify as deductible business travel expenses:
- Airfare, including first-class tickets and even flying your own plane
- The presidential suite in a luxury hotel
- Rental car expenses for a Rolls-Royce
- Boat tickets—and yes, this includes cruise travel
So whether you are planning to stay in a luxury resort in the Caribbean or you simply need to visit the in-laws two states over, you could save yourself a boatload in taxes when you turn your vacation into a business trip and deduct most or all of the cost.
Types of Travel Expenses
Transportation expenses
The cost of transportation in the 50 states and Washington, D.C., is an all-or-nothing expense. If you spend the majority of your trip days on business, you deduct 100 percent of your direct-route transportation expenses. If the majority of your days are personal days, you get zero deductions.
Life expenses
During travel, you can deduct the cost of sustaining life—these expenses include lodging and meals. You can deduct these expenses on business days but not on personal days.
The Basic Rule on Business Travel
According to the tax code, you can deduct your travel expenses as long as your trip is an “ordinary and necessary” cost of doing business.
The courts have interpreted this rule extremely broadly. For example, an “ordinary” expense does not have to be a common practice in the industry. “Necessary” does not refer to a business need but rather to something that is “appropriate and helpful.”
As a result of this broad interpretation, the tax code rule isn’t very helpful unless you know more. That’s okay. We know it’s hard for our friends in Congress to come up with simple, clear rules.
To get the real story on business purpose, you have to sift through case law and see what the courts say in particular cases—which we do for you beginning with the next section.
The Real Test
When courts decide business purpose cases, they consider all the relevant “facts and circumstances,” which for our purposes means we have to compare and contrast each case to find the overarching, guiding principles we can use in practice.
We have summarized the case law into five rules that you can use to justify a business purpose for your trip:
Profit motive
You need to have a reason why the trip will help your business make money. You don’t have to show an immediate profit, but you must expect the trip to create profit for you at some point in the future. Write this reason down in your records.
Stay overnight
Remember the overnight rule. You get deductions only for business trips on which you stay overnight away from your tax home.
Apply the “for only” test
When you plan your trip, ask yourself: Would a rational businessperson travel for only the business reason—or is the personal element so important that it destroys the business purpose?
Primary purpose test
For travel in the United States, you need to pass the primary purpose test. The easy way to do this is to make the majority of your travel days business days.
Maintain good records
This may be the most important step for your business travel deductions. You must keep the right records, as we explain below.
The Cases
Since courts decide cases based on specific facts, it’s helpful to hear the details of some actual cases.
The next few sections summarize some relevant cases, starting with the winners and then showing you some losing arguments that cost business owners their deductions.
Board Meetings in Resort Locations
Charles Hinton III was the sole owner of United Title Company, a C corporation based in North Carolina. Each year, Hinton sponsored an out-of-state board meeting, the first year in New Orleans, the next year in Las Vegas, and then in Puerto Rico.
Hinton invited
- the 11 to 14 corporate board members, and
- select North Carolina real estate attorneys, developers, real estate agents, bankers, lenders, and their spouses or friends (the “business guests”).
During the trips, the corporation conducted the annual board meeting, and then the corporate employees met with their business guests to discuss underwriting policy and other topics related to the business.
Court ruling
All travel expenses were deductible (except for those for non-business spouses and friends). The corporation needed to hold the meetings in interesting locations to ensure that their business guests would attend. The corporate employees benefited through the business discussions and by strengthening their relationships with other businesspeople in their field.
Trips to Expand Business
Raymond Jackson won his travel deductions for trips he took outside his normal sales territory to pursue new client accounts. The trips gave him the opportunity to expand his business by finding new clients.8
Note that if you are creating a new business and it does not yet exist, you have to treat these expenses as start-up expenses, which are subject to special tax treatment
Justifying Travel with a Convention or Seminar
Conventions are a great reason to travel, since they often take place in areas that double as nice vacation spots. Here are a few points to remember with regard to conventions:
- Travel expenses to conventions inside the North American area are deductible if the convention advances the interests of your business.
- Conventions outside the North American area must relate directly to the conduct of your business, and it must be reasonable for the event to take place in the chosen location.
- If the convention provides videotaped lectures, you can deduct travel expenses only if you could not view the lectures from any other location. In other words, if you could have viewed the streamed lecture from home, you get no travel deductions.
- You cannot deduct the expenses when the seminar relates to one of your investment activities and not to your trade or business.
Justifying Travel with a Convention or Seminar
Conventions are a great reason to travel, since they often take place in areas that double as nice vacation spots. Here are a few points to remember with regard to conventions:
- Travel expenses to conventions inside the North American area are deductible if the convention advances the interests of your business.
- Conventions outside the North American area must relate directly to the conduct of your business, and it must be reasonable for the event to take place in the chosen location.
- If the convention provides videotaped lectures, you can deduct travel expenses only if you could not view the lectures from any other location. In other words, if you could have viewed the streamed lecture from home, you get no travel deductions.
- You cannot deduct the expenses when the seminar relates to one of your investment activities and not to your trade or business.
Bad Records Will Sink You
Tax law requires you to keep records of the following elements as proof of your business travel
- The amount of each separate expenditure for traveling away from home.
- The date of departure and return for each trip, and the number of days during the trip spent on business.
- The name of the city or town you visited.
- The business reason for the travel or the nature of the benefit you expected to gain from the travel.
The Real Test
If you are thinking of going on a vacation, try mixing in some business. If you find the right business reason and spend enough time on business during the trip, you can make your travel expenses deductible.
With regard to the business reason, remember these five key principles
Profit motive
You need to have a reason why you expect the trip will make money for your business, whether immediately or sometime in the future.
Stay overnight
Remember the overnight rule. You get deductions only for business trips on which you stay overnight away from your tax home.
Apply the “for only” test
When you plan your trip, ask yourself: Would a rational businessperson travel for only the business reason—or is the personal element so important that the trip does not make business sense?
Primary purpose test
For travel in the United States, the easy way to pass the primary purpose test is to make a majority of your travel days business days.
Maintain good records
This may be the most important step for your business travel deductions. You must keep records with all the elements the law requires.
