Can you deduct your vacation expenses? Yes, but there is one small catch; there must be a business connection. Specifically, the reason for the trip must be for business, but mixing business with pleasure is perfectly legal. It's not unheard of for business travelers to incorporate some personal time into their business trips, so why not build an entire vacation around it?
Skeptical? Even the IRS rules state if your trip was primarily for business but you extended your stay for a vacation, made a pit stop, or had other non-business activities, your business related travel expenses are deductible. Cool! The IRS just gave you a hall pass.
Certainly, there are a few more conditions to maximize the business turned vacation deductions. For one, you must be self-employed or small business owner. This won't work if your employer pays your travel when they send you on business trips. And, there are of course IRS rules that must be followed for this to work. The IRS can be demanding when it comes to rules. Here's how to make it happen.
1. Establish a business purpose ahead of time. Your trip must have a prior set business purpose. A prior set business purpose means meetings and appointments are arranged before the business travel even begins. A business trip arranged for, or including, business seminars and conferences does count, but only if they are directly related to your trade or profession.
2. Travel far enough away for an overnight stay. The travel must be away from your regular place of business and must require substantial rest or have an overnight stay. The business days should exceed the personal days and travel days are considered "business days." If you take into consideration that Monday thru Friday are counted as business days and weekends are not, building a weekend into your business trip is a good strategy to maximize the vacation deduction. If you do business on Friday and on the following Monday, travel related expenses in between are deductible.
3. Know what expenses you can deduct. When your primary reason for travel is for business, all of your transportation costs, whether by plane, train, or automobile, are fully deductible. If you drive to your destination, you can take the standard mileage rate of 56.5 cents per mile (2013 rate) plus any parking and toll expenses. All the lodging, tips, and car rentals for business travel are also fully deductible, with food and meals limited to 50%. The cost of laundry and dry cleaning typically count as well.
4. Make it a family vacation. Of course the family can come along, but you can only deduct the expenses you would ordinarily pay for yourself. If you travel by air, your family's tickets are not deductible. But if you drive, your transportation is fully deductible no matter how many people tag along in your Fordosaurus. Lodging is still deductible, but any upgrades to fit the family are not. You can only deduct the business expenses you would pay as if you were traveling alone.
5. Keep it reasonable. The IRS likes to use words like "reasonable" and "ordinary" when referring to deductible expenses. Don't travel like a rock star unless you actually are a rock star. All business related expenses should be "reasonable based on the facts and circumstances."
6. Keep really good records! Use your log book to write down expenses or use widely available expense tracking apps on your smartphone. Even though strict substantiation for travel expenses, other than lodging, isn't required for expenses under $75, including these in your record keeping lends a bit more credibility to your deduction. Other items such as schedules and itineraries are good to keep to support your deduction, especially to prove the trade related nature of conferences and seminars.
So, you could fly to Orlando on Wednesday and get there early enough to sunbathe on the beach. Tricked you- no beaches in Orlando. Rewind. You fly to South Beach on a Wednesday and hang out with King James. Thursday you have an early morning meeting with a client, then follow-up with a lunch meeting on Friday. Saturday and Sunday are spent snorkeling and sightseeing. Monday, you attend a trade related seminar and Tuesday night you fly home. Your deductible business expenses for the trip would be:
$800 for round trip ticket
$869 for 6 night hotel stay (Sat & Sun count only if between business days)
$275 for car rental
$140 for seminar
$150 for 50% of business meals
Yes, for everything else there's Mastercard. That's not a bad chunk of change! All you probably did differently was take an earlier flight there, take a later flight home, and planned your business meetings early. Adding a weekend in between is a bonus. Either way, the business travel expenses remain the same.
One last thing, these strategies are intended for travel within the United States. If you're planning on watching the parade at the 2016 Summer Olympics in Rio De Janeiro and calling it business travel, don't do it. If your main consideration for traveling outside of the U.S. was vacation oriented, no deduction can be taken. The IRS will expect a good reason for why your business couldn't have been conducted within the United States. Even then, 75% of the trip must be for business as a good jumping off point. Anything less than that, starts looking like a vacation in disguise.