Now that summer has come and gone leaving behind a trail of vacation memories—and expenses—you may be looking for ways to recoup some of the cost. Can you legally write off your trip? If you’re self-employed—for example, if you’re an entrepreneur, freelancer, or consultant, or have an online business—and did some work while on the road, there’s a good chance you can.
Here’s what it takes to get two thumbs up from the IRS.
Pass these four tests
For starters, your trip must have a business purpose, meaning it must include activities such as client meetings, attending a conference, being a guest speaker at a conference, doing research and development for the business, or holding a board meeting or annual shareholders’ meeting. The activity should have the potential to generate revenue.
The second and third requirements deem that the trip must be both “ordinary and necessary,” according to IRS guidelines on business travel expenses. “An ordinary expense means it’s typical in your business, both [in terms of] amount [as well as in] frequency and purpose. Necessary means it actually helps you increase your profits or expand your business,” explained Tom Wheelwright, a certified public accountant and author of the book Tax-Free Wealth.
Lastly, every expense must be properly documented. To get a deduction for travel, Wheelwright said that you must spend more than half your time during the business day doing business and have everything documented. “So, if you spend four and a half hours a day doing business, it becomes deductible. You also must have documentation, which includes receipts, of what you did, and a log of your expenses,” said Wheelwright.
On receipts, write the name of the client who you had the meal with for further proof. “Save the emailed confirmation and receipt from the hotel reservation or conference ticket payment that show the dates, times, and name of the events as well as the receipts from the travel it took to get there and back [such as for gas or flights],” said Ben Watson, founder of Fiscal Fluency, a personal finance and business coaching company.
Know, too, that you must be away from home overnight—the IRS requires an overnight stay for the trip to qualify as business travel, explained Wheelwright.
Domestic travel versus travel abroad
There’s a big difference between how you calculate deductions if the work trip was taken in the United States versus abroad. According to Wheelwright, “It’s an all-or-nothing test in the U.S., so either you spent more than 50 percent of your time on business, and it’s all deductible, or you spent 50 percent or less and none of it’s deductible.”
For international business travel, the deductions work differently. He explained that when you travel to another country, the deduction is proportionate. “For example, if you spent 40 percent of your time doing business in Italy, then 40 percent is deductible,” said Wheelwright.
Stick to the rules
It has to be a legitimate business trip. “You can’t simply do some work while on the beach and call it a business trip,” said Watson. But if you add a couple days at the beach onto your preplanned business trip to the coast, you could still write off at least some of your lodging fees, he explained. If you do extend your trip for vacation, you can only deduct the expenses that were directly related to work and took place on the days that you conducted business. If you are traveling to multiple cities, keep in mind that each must have a business purpose.
You do have to work. If you are at a conference, make sure you fully participate, which means not just attending one or two sessions. If you only attend a small number of the business-related events, the entire purpose of the trip would be considered a personal trip with “incidental” business activities, pointed out Watson. Remember you need a log of what you did, and if it’s thin on details, it could prove problematic. “You don’t want to lose the ability to deduct transportation, lodging, meals, and other expenses,” said Watson.
If it’s a business trip of your own making, be sure it includes meetings with clients or participating in some work-related activity. “To demonstrate evidence of these events, it’s wise to put calendar appointments down in your phone in advance and hold onto receipts when the time comes to file your tax return and claim your deductions. Remember, the primary purpose of this trip is [supposed to be] for work,” said Riley Adams, a CPA and personal finance blogger for the website Young and the Invested.
Don’t try to bend what “ordinary and necessary” means. “If you have the ability to accomplish the same business tasks while staying at a modest hotel as you would at the Four Seasons, you’ll have a hard time justifying the extra cost if you’re ever audited,” cautioned Watson.
Stay at a place that is similar to places you normally stay on a business trip, so your expenses are considered “ordinary.” Wheelwright explained that if you usually stay at five-star hotels for your business trips, then the Four Seasons would fall into the same category. However, if you usually stay at hotels like the Comfort Inn, and suddenly switch to a luxury hotel, the high-end venue could raise red flags with the IRS. He said that it doesn’t matter whether you stay at a hotel or a vacation rental, the quality level and price tag should be similar to what is typical for your business trips.
When traveling with non-business companions, such as a spouse or family members, you may only deduct the cost of the lodging you would have paid if you were traveling alone—for example, if a single room costs $150 per night, and you paid $200 for a double room, you could only deduct at the $150 rate.
What can you deduct?
Personal meals are not deductible, but half the cost of food expenses related to business can be deducted. Expenses for your family’s meals and entertainment cannot be deducted unless they are actively engaged in the business and you can show that their expense is both ordinary and necessary.
Also, travel expenses are only deductible on the days in which the work-related event occurs. “For example, a taxi ride to the meeting, train to a conference, or plane ride to the event [are deductible],” said Adams. “Lodging, much like travel expenses, is deductible on the days in which business is set to occur.”
It’s best to put your “vacation” days in the middle of the business days, advised CPA Greg O’Brien. “For example, if [a] business owner took a seven-day trip to Florida and spent five days meeting with clients or prospects and two days relaxing on the beach, this would still qualify as a deductible business trip. The trick is to stick the ‘vacation’ days in the middle of the business days,” he says.
By placing the vacation days in the middle, the travel days to and from are still considered business related, rather than personal.
Watson offers another tip: “Laundry, dry-cleaning and shoe-shine expenses are perfectly acceptable expenses if incurred shortly after returning home.”