Taking a vacation can be expensive, so naturally the idea of deducting your vacation expenses on your tax return is an appealing idea. However, before you get carried away planning a lavish vacation with the hopes of writing off the entire cost, make sure to familiarize yourself with the requirements to qualify your expenses as business travel. To qualify for a tax deduction the trip needs to serve a legitimate business purpose. Handing out business cards on the beach does not count. There are 5 criteria your trip must meet to be a qualified business expense:
- Profit motive. The trip must serve a legitimate profit motive. This means that you can reasonably expect the trip to create profit either now or at some point in the future.
- Stay overnight. You can only deduct meal and lodging expenses when you are away from home overnight.
- “Rational Businessperson” test. Your trip will only qualify as a business expense if the business motive is strong enough that a rational businessperson would make the trip if business was the only motive.
- Primary purpose test. You can only deduct your travel expenses when your trip is primarily for business. This is determined by calculating the number of business days vs personal days of the trip. This may sound like a deal breaker, but it is easier to meet this requirement than you think.
- Maintain good records. If you do not properly document the business purpose of your trip, your travel expenses, or your actual business activities on the trip you will risk losing your entire deduction.
Your trip expenses can be broken down into two general categories with different requirements to be deductible:
Transportation costs include airfare, train tickets, or the cost of a rental car to get to your destination. These expenses are all-or-nothing, if the majority of your trip days are business days you can deduct all of your transportation costs. If the majority of your trip days are personal you cannot deduct any of these costs.
Life expenses include your daily meals and lodging. Unlike transportation expenses you do not need to meet the majority of business days threshold to take life expenses. Instead you simply take the life expenses for each business day of the trip.
What Counts as a Business Day?
It may be easier than you think to qualify most of your trip as business days. Each day of the trip only needs to meet one of these criteria to qualify as a business day:
- Work more than four hours. You have a workday when you spend more than half of normal work hours pursuing business. Since a normal workday is eight hours you only need to work for more than four.
- Presence-required day. If you are required to be at a destination on a specific day for a legitimate business purpose. For example, if you have a meeting with a client in another city on Tuesday, then Tuesday qualifies as a business day even if that is your only business activity for that day.
- Travel day. Days you spend traveling to or from your business destination count as business days as long as you are traveling in a reasonably direct route.
- Weekends and holidays. If a weekend or holiday falls in between two business days you can count those days as business days as long as it would not be practical to return home in between the two business days. If you live in California and have meetings in New York on Friday and Monday, it would not be practical to return to California for the weekend. Therefore, all four days count as business days.
- Saved-money-on-travel days. If you arrive at a destination a day early or leave a day late in order to save on your travel expenses you can count the extra day as a business expense as it served a legitimate business purpose of reducing your travel costs.
The rules governing business travel allow for some freedom to deduct vacation time as business expenses, but do not provide a blank check to write off an entire vacation simply because you spent a few minutes discussing business. You need to find the right balance between work and relaxation, properly document your work activities, and maintain records of all your expenses.