Special tax benefits are available if your business takes you away from home. Suddenly, expenses that are nondeductible at home—including the cost of meals, commuting costs between your temporary residence (a motel or hotel) and your temporary work site, and laundry and dry-cleaning costs—become tax write-offs.
To qualify for this alchemy, you must be away from home on business at least overnight but not so long that the IRS figures you've really moved to the new location. The IRS assumes your away-from-home assignment is temporary if it lasts less than a year. Go beyond one year, though, and you're out of luck when it comes to these deductions. The law says more than one year is not temporary.
Whether you're on a business trip that keeps you away from home for just one night or on assignment for several months, the major deductible travel expenses can include:
The cost of getting to the new location, whether in your own car or via plane, bus or train;
The cost of getting around on business while there, via your own car, a rental car or public transportation (including the cost of what would be nondeductible commuting at home); and
The cost of meals and lodging while away from home, whether or not there is any specific business purpose for the meal. Only 50% of the cost of your meals is deductible, though.
If more than half your time is spent pursuing good times instead of business, you're going to have a difficult time showing the primary purpose was business.
When business is the primary purpose and the travel is within the United States, you can deduct the full cost of your transportation to and from the business site, including the cost of any meals and lodging en route. What you spend while vacationing in the area would be nondeductible. Say you fly to Honolulu for a five-day business meeting, then extend your stay for four days of swimming, sight-seeing and luaus. The cost of the flight to Hawaii would be deductible, as would the cost of lodging and 50% of the cost of meals during the business part of your trip. None of the cost of food or lodging on the personal days could not be written off.
What if your spouse goes along? That does not obliterate your right to business write-offs, but it's now almost impossible to deduct any of his or her expenses. Such expenses are only deductible if your spouse is an employee of the business and has a bona fide business reason for accompanying you.
Although you normally can't write off the extra costs incurred because your spouse is along, your husband or wife may still enjoy a tax-subsidized holiday. The reason: When your spouse accompanies you, your costs are likely to be less—perhaps significantly less—than twice what it would have cost you to go alone. The cost of a double room in a hotel may be the same, or only slightly more, than the cost of a single, for example. You get to deduct the full single-room rate, not half the double-room cost. Also, if you drive to the business meeting, the cost of operating your car or a rental are the same whether you go alone or have company—and so is your deduction.
When you mix in too much pleasure with your business, you risk losing the write-off for transportation costs. If the primary purpose of the trip is personal, you cannot write off any of the cost of getting to and from the site of the business meeting, although you may still deduct business-related expenses at the destination. Clearly, this is an area where careful planning can pay off in handsome tax savings and some personal pleasure to boot.
The rules are different if your business takes you out of the country—in some ways more strict, in others more lenient.
As with domestic travel, your costs, including transportation, food and lodging en route, are deductible if the primary purpose of the trip is business. But unlike the all-or-nothing rule for domestic travel, it's possible to qualify to deduct part of your foreign travel expenses.
You can pass the primarily business threshold—and write off all your travel expenses—if the foreign trip takes you out of the United States for a week or less. If the primary purpose of a trip to Paris was an important one-day business meeting, for example, you could spend six extra days sight-seeing without forfeiting your travel-expense write-offs. Your sight-seeing expenses would be nondeductible, of course, but the full cost of getting to and from France could not be written off.
For trips that are longer than a week, at least 75% of the time you are out of the country must be devoted to business. If so, your travel expenses are fully deductible. But if you fail the 75% test, you have to split travel costs between business and personal purposes according to the number of days spent on each. If the trip is primarily a vacation, though, none of the travel costs are deductible.
When counting up business days, include:
When the convention is held within the "North American area" (including the United States; Canada; Mexico; Puerto Rico; U.S. Virgin Islands; Jamaica; Guam; American Samoa; and Barbados, Bermuda, Costa Rica, Grenada and several other Caribbean countries), your expenses of attending are deductible as long as you can show that the convention agenda is connected with your business or job. For your traveling expenses to be deductible, of course, the primary purpose of the trip must be business related.
Foreign conventions are a different matter. In fact, it's difficult for any convention outside the North American area to qualify for tax deductions. For expenses to be deductible, the convention must be directly related to your business; domestic meetings must be of only general benefit to your job or business. The tougher hurdle for a foreign convention is that it must be as reasonable to choose the foreign site as it would be to hold the convention within the favored North American area.
What if the ingenious convention planners choose a cruise ship as the site of the seminar? The cost can still be written off if you can show the meeting is directly related to your business. But there is a $2,000 limit on how much you can write off for cruise conventions each year. Also, to qualify, the ship must be registered in the U.S., and all ports of call during the convention must be located in the United States or its possessions.
There's another special requirement for cruise conventions: To claim the deduction, you must include with your tax return a signed note from the convention sponsors listing the business meetings scheduled each day aboard the ship and certifying just how many hours you spent attending those activities.
And, deductions for a couple of types of conventions are outlawed entirely: Those focusing on personal investments or financial planning and those where the primary activity is the distribution of videotapes for participants to watch at their convenience. No matter how vital the videotape to your business, you can't deduct the cost of going to the convention to pick it up.
Be prepared for serious IRS scrutiny if you deduct business travel, entertainment or convention expenses. For business meals and entertainment, you must have a receipt for any expense of $75 or more. You also need a record—perhaps in a daily diary or business log—of:
To deduct the costs of traveling away from home overnight on business, you must have a receipt for all lodging expenses. Your records must also show the day you left home, the date of your return and the business purpose of the trip.
For those who don't want to bother keeping track of daily meal expenses, the IRS offers a standard allowance that can be claimed in lieu of actual expenses. It can range from about $30 to $50 a day, depending on where your business takes you. IRS Publication 463 includes a complete list. (Call 1-800-TAX-FORM for a free copy or download a copy from the IRS website, http://www.irs.gov/formspubs/index.html).
You can claim a larger deduction if you have proof of higher expenses, so your best bet is to jot down the amounts in a business log and keep receipts for any meals costing $75 or more.
When you're combining a vacation with a business trip, keep careful records of how much you spend each day so you can show that you pass the primarily business test necessary to convert your travel expenses into tax deductions. If a convention is involved, keep the program, with notations on which sessions you attended. When a cruise-ship convention is involved, you'll also need the signed statement mentioned earlier.