Is it possible to turn non-deductible personal travel expenses into tax deductible business travel expenses? Yes! You can deduct your vacation as a business expense. . . as long as you know the rules and follow them.
Personal travel expenses are never deductible. Even work related travel expenses are not deductible by the employee since the passgae of the Tax Cuts and Jobs Act of 2017. (Here is how to deduct work expenses.)
Then how can you deduct personal travel expenses? Simple. Follow the rules for business travel.
The best way to clarify what qualifies as a tax deductible travel expense is with examples. Taxes are not a hard science. There are times there is more art than science in determining what can be deducted. Examples help clarify what is allowed.
Deducting a Road Trip Vacation as a Business Expense
Recently I took a road trip with my wife from the Green Bay area to Austin, TX. It was a zigzag down the backbone of America.
The road trip started as a personal family vacation. That would be non-deductible. However, I decided to meet several clients along the way with the final desination just south of Austin, Texas at a bookstore. The bookstore owner held promotional possibilities for this blog and my tax practice.
Every expense from this trip was deductible as a business travel expense for both my wife and me. The only expense not deductible was entertainment. Entertainment expenses were disallowed by the Tax Cuts and Jobs Act of 2017. Visits to the zoo in Memphis and museums were personal expenses and not deducted.
Phantom expenses were also allowed. These deductions exceeded actual cost so the deduction was larger than the out-of-pocket spending. (I will discuss mileage and the meal per diem below.)
Let’s not focus on what we can deduct at this point; let’s focus on why we can take the deduction.
As noted, this road trip included both me and my wife. Both our expenses were allowed! Why?
First, I own my own accounting practice and have the great fortune of serving clients around the United States. Many of these clients I have never meet in real life. This was a great opportunity to tour their business, allowing me to better serve their needs. This is good for them and me.
Next we need to ask why my wife’s expenses were allowed. The short answer is, she works in my business and gets a W-2 (and has for over 20 years). Her participation was valuable and necessary.
Family Members on a Business Trip
There is nothing wrong with taking family members on a business trip with you! However, there is a limit to what you can deduct.
If there are no additional hotel costs the entire lodging cost is deductible. If the kids come with you on your business trip and they have a seperate room at an additional cost, the additional cost is a personal expense and not deductible.
Getting to your destination is a deductible business travel expense for you. If you drive, there is no additional cost and the full amount is deductible. If you fly or use another mode of transportation where there is a fee for each person, only those on the trip for business purposes are deductible expenses.
As you can see, most expenses are still deductible if the family comes with you.
A few notes about a spouse on a business trip. All three rules below must be met:
• Your spouse must be employed by you or a business partner (partnership tax return).
• Spouse must have a bona fide business purpose for traveling with you.
• Spouse’s expenses are otherwise deductible. (No personal expenses qualify for a deduction.)
Deductible Personal Time
You are not required to work seven days a week when on a business trip. Non-workdays are still part of the business trip. Meals and lodging expenses are deductible.
On my road trip I often times visited clients on weekends. That did not mean I was not allowed two days off per week. Monday was better as a day off so I used Monday as a personal day. Entertainment expenses were not qualified expenses, but meals and lodging were.
Define What A Business Trip Is
Here is where taxes become more art than science. The rules are not always crystal clear. Facts and circumstances prevail.
My road trip is an example that is well into the deductible territory. I met several current clients; toured thier business; helped these clients with difficult business issues while there and later back at the home office. My wife was part of the process. When it comes to taxes, I’m the guy in my office; when it comes to organization and getting things done, my wife/employee is a bigger asset to the firm than I am.
More examples will clarify:
• Let’s use the bookstore owner in Texas. If he travels to see other bookstores he might have a deductible travel expense. Signing copies of his book, encouraging the bookstore to carry his titles and more move a personal vacation into the business travel column quickly. However, the number of days dedicated to business will limit meal and lodging expense.
• I have a physician client that has family in another state. He owns his own practice. He built a relationship with a doctor on a research project in the area where his family lives. Travel costs are all deductible, as well as, all expenses connected to work days with his research partner. Weekends are still qualified as business trip time so he can spend time with family.
• Don’t forget investment property owners. They also can enjoy a business trip. Note: Buying a rental property in all your favorite holiday destinations is not enough to qualify as a business trip. Just visiting your property is not a business trip. Conducting repairs and maintenance, screening tenants, filling vacancies, working with your property manager and searching for new properties are. Remember, if you own an income property and spend a month at the property remodeling, you can take the meal expense for the entire time and any hotel costs, if you don’t stay at the property.
• You do NOT have to be away from home for a full 24 hours to meet the overnight rule and get the ability to claim lodging and meal expenses (Revenue Ruling 75-170). Leaving late afternoon to visit a client, staying in a hotel overnight, and returning home in the morning still counts as business travel, assuming it is reasonable not to drive home that evening. Meals and lodging are qualified expenses.
• You don’t even have to be away from your tax home for travel expenses to qualify. I use this strategy for conferences. As I get older, driving an extra hour or two after a long day of classroom study is not safe. Driving back to the conference the next day isn’t any better, in the case of multi-day conferences. I miss any opportunity to work with peers if I head home as soon as class lets out. Now I get a hotel room and save on the driving time and take the social opportunities for business growth, plus a deduction. Here are the rules you need to follow:
• The lodging expense allows you to participate fully in the meeting, training, conference or other business fuction.
• The lodging is for 5 days or less and occurs no more than once per quarter.
• If you are the employee, your employer must require you to stay at the activity or function overnight.
• The lodging cannot be lavish and there is no significant element of personal pleasure, recreation or benefit. In other words, lodging at a waterpark might be a stretch unless the conference is at the waterpark.
It is relatively easy to build a business trip with all the accompanying deductions. Attending conferences is the perfect way to learn and have fun. The IRS actually has training classes for tax professionals in cities like Las Vegas and Orlando for a reason. Even they know the trick of getting a tax break and a vacation at the same time.
You can extend a business trip an extra day to take advantage of a reduced airfare. The additional lodging and meal expenses are deductible because they are for a valid business purpose: to reduce travel costs. (Letter Ruling 9237014)
Lodging costs when I am at a 2-day conference an hour drive away falls in the same category. The mileage rate is reduced by as much or more than the lodging cost. So I take the low cost route and get adequate rest.
Conventions in North America
Travel expenses are deductible when attendence benefits your trade or business. Certain conventions are not deductible, for example: investment, political, social and other non-business related events.
However, investment conferences might still be deductible if you are in that line of business. Real estate agents, finacial planners, stock brokers, and even accountants and attorneys may qualify for certain conventions in this category. Real estate investors and real estate agents may have qualified expenses from conventions of an investment nature.
Conventions Outside North America
Travel outside North America is deductible only if:
• The meeting is directly related to your trade or business, and
• it is reasonable to hold the meeting outside North America.
Once again, there is more art than science involved. Reasonablness is based on the purpose of the meeting, activities taking place at the meeting, activities of the meeting sponsor, home of the sponsor and other relevant facts. The road seems wide enough for many trips to be classified as business in nature outside North America. Consulting a qualified tax professional is always a good idea, as expereince is needed to make a good decision on rules where facts and circumstances prevail.
Travel Outside the United States
For travel outside the U.S. to be deductible, the entire trip must be devoted to business activities. If the primary reason is personal (as you can do with travel in the U.S.), none of the expenses are deductible.
A trip primarily for business that includes personal activities must have travel expenses pro-rated between business and personal. You divide the total number of business days outside the U.S. by the total number of days outside the U.S.
Days traveling to and from your destination are considered business days.
Weekends and holidays are considered business days.
A business trip is considered entirely business, even if non-business activities took place, if:
• You do not have substantial control over arranging the trip. This generally applies to employees. Self-employed individuals generally have substantial control over trip planning.
• You were outside the U.S for a week or less. Do not count your departure day, but include your return day.
• Less than 25% of total time spent was on non-business activities. Count the day of departure and return for this purpose.
• You must establish a vacation was not a major consideration of the trip.
Cruise Ship Conventions
You can even deduct up to $2,000 per person per year for a business convention or seminar on a cruise ship. To qualify, the trip must:
• Be directly related to your trade or business.
• You travel on a U.S. flagship.
• All ports of call are within in the U.S. or its possessions.
In addition to the above requirements, you need to attach two statements to your tax return:
Statement #1 A signed statement listing the number of hours each days devoted to business activities, total days of the trip, and program of business activities.
Statement #2 Statement signed by an officer of the sponsoring organization with a detailed daily scheule of meetings and number of hours you attended.
Legal Fake Deductions
All expenses must be substantiated. The cost of hotels, airfare, conference and more require a detailed receipt of the expense.
However, meals, auto miles and expenses under $75 often do not need a traditional receipt. For meals you can use a per diem and the mileage rate for using your vehicle versus actual expense. Let’s look at the details so you get all the deductions you legally are allowed without a crazy amount of documentation.
Meals and Incedentials: Keeping track of meal expesnes can be a serious burden while traveling. A sale or client can be lost while you horse around getting a receipt.
A better way is to use the per diem. The government provides a handy website for calculating your deduction here. Rates usually change every year on October 1st.
Normally meal expenses, including the per diem, are 50% deductible. However, for 2021 and 2022, the per diem is 100% deductible (Notice 2021-63). Meals from restaurants and takeout from restaurants also get a 100% deduction for 2021 and 2022 when you use actual expense.
Also, you are not married to actual expense or the per diem for the entire tax year. You only need to be consistent on a per trip basis. That means if the deduction is higher with the per dium on one trip and actual expense gives you a bigger deduction the next trip, you can swith methods between trips.
As you can see, it is possible to deduct more than you spend, creating a legal fake deduction when it comes to meal expenses.
Miles: Driving your vehicle for business is deductible. You can use actual expenses or the mileage rate. If the cost of operating your vehcile is less than the mileage rate you have created another legal fake deduction.
You also have a tax strategy. If you use the mileage rate you can switch to actual expense at any time. You do need to adjust the basis of your vehicle for the depreciation component in the mileage rate. Once you use actual expense, however, that vehcile must always remain on actual expense. If a large repair bill occures switching could become adventageous.
Expenses Under $75: When traveling, expenses (other than lodging) under $75 generally do not need a reciept. You do need to keep a record showing the time, place, amount and business purpose of the expense. (Regulation 1.274-5(c)(iii))
When a receipt — tolls, for example — are unavailable a receipt is not needed. Just keep a record of the expense in your accounting records with the information listed in the paragraph above.
A Short List of Deductions
Here is a list of things you can deduct from a business trip. The list is not exhaustive. Generally, any expense necessary during a business trip is deductible.
• Transportation: Planes, trains and automobiles from your home to destination. If the ticket is covered by a frequent flyer or similar program the cost is zero and there is no deduction. Better to save those rewards for personal travel..
• Communting: Bus, taxi airport limo to and from the airport and hotel, the meeting place, client hotel or client business.
• Baggage and Shipping: Sending baggage, displays, samples, materials between temporary and regular workplace.
• Lodging and Meals: See rules above.
• Cleaning: Dry cleaning and laundry.
• Telephone: Business calls on a busines trip. Includes fax and other elctronic services. Courier, also.
• Tips: Tips for any expense on this chart.
• Miscellaneous: Any other similar, ordinary and necessary expenses related to business travel. Examples: remote internet access and computer rental fees.
This handy guide can help in the trip planning process. A side hustle or business can have serious tax advantages when you know the rules. Understand, a side hustle can be a business if it is engaged in with the intent to make a profit. Don’t play the side hustle fast and loose. That can cause a tax backfire.