Small Business Taxes & ManagementTM--Copyright 2014, A/N Group, Inc.
Business or Pleasure?
It would be nice to get a tax deduction for a pleasure trip, but that's not usually the possible. You may, however, be able to take a deduction for a combined trip. The key here is to make sure the primary purpose for the trip is business. Even then, not all your expenses may be deductible.
General rule. If you engage in both business and pleasure at the destination, you can deduct traveling expenses to and from the destination only if the trip is primarily for business. If the trip is primarily personal in nature, the traveling expenses are not deductible, even if you engage in business at the destination. However, expenses while at the destination which are allocable to business are deductible even though the traveling expenses are not.
Example--You travel to New Hampshire to visit your sister for a week during Thanksgiving. While there you travel to downtown Boston to have lunch with one client and dinner with another. You discuss business with both clients and spend time outside the meal meetings with both clients. You take a hotel room for the night and have a breakfast meeting with a third client before going back to your sister's house. While the traveling expenses to and from New Hampshire (and any expenses incurred there) are not deductible, expenses associated with the business meetings (train, taxi, meals, hotel room, etc.) are deductible.Primarily. This is the key word here. Whether a trip is primarily for business or personal purposes depends on all the facts and circumstances. The amount of time spent on personal activities compared to the time spent on business is an important factor. You can't change a personal trip into a business one by simply visiting a few clients, dropping your business card at a couple of potential clients, etc.
Example--You take a business trip to Maine and spend four full days visiting clients on sales and service calls. You extend your trip one day to go shooting with a college buddy. The travel (airfare, auto) to and from your destination (but not including the side trip) is fully deductible as is four of the five days' hotel expenses.Records. Recordkeeping is very important in providing the amount of time spent on business and pleasure. Your diary should show the time spent on various activities. Listing lunch with a client along with the business discussed (necessary for that lunch deduction) may not be enough. For example, you had meetings each day on a 5-day trip in a resort area. All you recorded in your diary was 5 lunches when, in actuality, each meeting started at noon and went into the late evening. An agent may challenge the primary purpose of the trip. That wouldn't be the case if you showed the total time for each meeting, participants in the meeting, items discussed, etc.
The greater the possibilities for vacation activities at the destination, the better your recordkeeping should be. For example, a three-day visit to a paper mill in Fort Kent, Maine probably needs less detail than a similar visit to Miami. Think it seems like a lot of work? It could mean the difference between hundreds, or even thousands, of dollars in deductions.
Have relatives in the destination area? Taking your spouse (and/or children) along? Another reason to be careful with your recordkeeping. If you do take your spouse or a relative on the trip their expenses are not deductible. For example, your primary purpose of the trip is clearly business. But the destination is an area the family wants to visit. You can't deduct the airfare, meals, or hotel accommodations for the other members of your party. You can only deduct the cost of a single occupancy room at the hotel.
You can deduct your spouse's expenses if he or she is an employee and is required for valid business reasons to be there. For example, you sell an expensive machine. You're the technical expert and salesman. Your wife, who's the chief financial officer, accompanies you to discuss pricing and financing options to the customer. Your spouse wouldn't qualify if he or she only provides incidental services such as keeping track of your notes or assisting in entertaining customers.
The above discussion applies to travel in the U.S. The rules are different (and more complex) for travel outside the U.S. Even if you travel outside the U.S. primarily for business but spend some of you time on other activities, you generally cannot deduct all of your travel expenses. You can only deduct the business portion of getting to and from your destination. There are several exceptions to even this rule. One of the exceptions applies to a trip of no more than a week (7 consecutive days). There's a good explanation of the rules in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Conventions. The same rules apply to business conventions and professional training seminars. These are usually held in resort areas, so use extra care in recordkeeping. In one case the court looked at the amount of time spent on business compared to recreational activities, the fact that the convention was held at a resort hotel, the primary purpose of the convention and how important it was for the taxpayer to attend.
Convention and seminar expenses related to investments are never deductible.
Travel by as well as seminars on cruise ships are subject to a number of special requirements. You must attach a statement providing information on the details of the time spent in business activities and a program of the schedule activities.
Teacher and life insurance salesman. In one case the taxpayer was a school teacher who sold insurance part time. He and his wife owned a condo in a resort area which they visited on vacations. They deducted the upkeep of the condo as well as meal and entertainment expenses and costs associated with a van they used to travel to and from the condo.
The taxpayer considered the trips to be business because he was prospecting for life insurance clients in the vicinity of his vacation home. If the taxpayer asked a golfing partner whether he needed insurance, he considered the game to be a business meeting and the expenses connected with that meeting deductible. The court found otherwise. It noted that the law requires a much more direct, primary relationship to the production of business income to show a meeting is a business meeting. Witnesses offered by the taxpayer could not confirm that they discussed insurance with him. Finally, the fact that his wife accompanied him on most of the trips, without any business reason, further indicated the trips were primarily personal.
Rental properties. You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. You must allocate your expenses between rental and nonrental activities. You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. The cost of improvements is recovered by taking depreciation.
Copyright 2014 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 07/25/14