12 Jul Can my Family Vacation Be a Tax Deduction? Planning Strategies to Save Money This Summer for Small Business Owners
You heard right– aspects of your family’s summer vacation may qualify you for a business tax deduction. It does take some planning and excellent documentation, but it’s one way that you can turn your family’s fun time together into a financial benefit come tax season. Here’s how to make memories and benefit your business financials on your next summer getaway.
Are Vacation Expenses Deductible?
Yes and no. While the IRS is not going to support your vacation habit, there are certain travel expenses that may be deductible as a business owner. And these expenses are potentially 100% deductible if you meet the IRS guidelines and are smart with your documentation. In order for your travel expenses to qualify, they must first pass these three IRS criteria:
1) Your trip is business related and is considered ordinary and necessary.
2) You are traveling away from your normal place of business for more than a day.
3) You need sleep or rest in order to complete your work while away.
Where some business owners get hung up is the concept of “ordinary” and “necessary” for business. Ordinary means that travel is typical for the type of work you do. Necessary means that the trip’s purpose is to enhance your business through either increased opportunities or profitability. So, while your family vacation may not always meet those criteria as a valid business expense, consider turning your next business trip into a family vacation instead!
How Much Work is Enough Work?
Just because it has to be a business trip, does not mean you have to be working all day while your significant other is parasailing or the kids are playing in the pool. In order for your travel expenses to be deductible you must spend more than half of the workday on business. For travel within the US, that means approximately 4 ½ hours of work or more for each weekday you are traveling. It’s worth noting that the rules for international travel are different and the percentage of deduction you’re allowed is equal to the percentage of hours you worked during the day.
What may your workday include? That time could be spent preparing for and meeting with clients or prospects, evaluating potential investments, or attending a shareholders’ meeting. You can also travel to attend workshops, so long as they are relevant to your profession.
When it comes to planning these meetings or activities, though, we recommend that you maximize the length of your trip by booking them across a weekend. That means if you schedule a meeting or two for Friday and then more meetings on Monday, you can deduct your travel expenses. The IRS requirement is that most of your trip be for business activities in order to make your travel expenses deductible. Planning ahead is key to ensuring that you are maximizing the deduction related to your travel plan.
And Then I Can Expense the Whole Trip?
Not quite. If you have valid travel that meets the three main criteria mentioned at the beginning, then you have a great opportunity to receive several valid IRS business expense deductions. When you travel, 100% of your car rental or air travel, your hotel, and your tips are deductible… if they meet some additional considerations.
For example, as the business owner/employee your airfare is 100% deductible. Your family members’ travel expenses are not, though, unless they are actively involved in your business and there is a business-related reason for them coming along. For example, if your spouse handles your bookkeeping, they would meet the criteria of being actively involved, however, they would not be able to demonstrate a need for accompanying you on travel. Therefore, their travel expense would not be deductible.
Your hotel room may be fully deductible for your family, so long as the cost of the hotel room is reasonable for what you’d spend if you were traveling alone. Therefore, it doesn’t make a difference to the IRS if you get a room with two queen beds instead of a king, but it would raise questions if you’re suddenly booking a two-bedroom suite when you traditionally would not do so.
Lastly, travel meals are 50% deductible and are limited to those members of the business who are dining with you. While receipts are not always required, it is still very important that you’re documenting your expenditures in case of an IRS audit. Let’s talk more about how to do that!
Document Your Travel Expenses Appropriately
We at Prestige Business Enterprise recommend keeping a travel tax diary. It doesn’t have to be anything fancy– a simple notebook or journal will do or you can document your travel details electronically. But it is a great and concise way to keep track of each travel expense as you incur it and ensure that you have a receipt for the expenses when required.
When are travel expense receipts required? The IRS will require you to have a receipt for any travel expense that is $75 or more (except lodging which always requires a receipt). Because things like tips, taxis, and meals may fall below that threshold, it is helpful to document the details of each in your travel diary. Be sure to include the following:
1) The date of the expense and the location.
2) How much you spent. (We also like to include what form of payment was used)
3) The business reason for the expenses.
4) If any clients or employees were with you and included in the expense total.
It’s important that you not only track your trip expenses but the details of your trip’s purpose. What clients or vendors did you speak to and what did you talk about? Were you there to network, renegotiate prices or tour facilities? Attending a conference on marketing, websites, and SEO for your business? Meeting with a realtor to scout prospective locations for your next warehouse? Write it down and provide evidence of the meeting where possible.
Turning your next business trip into a getaway for the whole family is possible and can get you the most bang for your buck from your travel dollars, but it only works if you are following the rules and staying on top of your documentation. Be aware that tax rules can change with each year, so it is important to consult a tax professional to ensure you’re on the right path.
Prestige Is Here to Help
If these tax tips have piqued your interest in more ways to save, consult our professional tax team. We have decades of experience in helping small business owners like you develop an effective tax strategy to help minimize their tax liability each quarter and at year-end. Call Prestige Business Enterprises at 813-774-5866 or email us at email@example.com to begin.