Mix Business With Pleasure
While Sharing the Tab with the IRS
Here are eight ways to ensure that you can have fun on business trips and still reap tax write-offs
By Rosalind McLymont
So you're looking for some savvy ways to have a little fun on your business trips? No problem. With some astute planning, tax deductions can make your pleasurable pursuits less costly. Just make sure you lay a paper trail to justify your write-offs. Here are eight suggestions:
1. Wrap your vacation around an out-of-town seminar.
"Combine a business meeting or seminar with vacation travel," advises Dennis Kroner, president of Pitt, Ryan & Linnear, a Chicago accounting firm. Say you want to play golf in Arizona and your industry association sponsors a workshop there in August. You go for five days of fun and spend three days in class. "You can deduct your airfare," says Kroner, "because you would have spent the money anyway, traveling to the educational program."
"Your travel costs will be deductible as long as the main reason for going is to attend a professional conference," says Larry Torella, tax partner at Eisner LLP, an accounting firm in New York. "That's true even if you go early or stay late, to spend an extra weekend away from home." For continuing education seminars to be deductible, the education must be needed to maintain or upgrade your professional skills.
Suppose, for example, that you fly to New York for a conference that ends on a Friday. Even if you stay until Sunday night or Monday, enjoying various pursuits, you can deduct all of your travel costs, including airfare. The same is true if you fly out Friday night for a conference that begins on Monday. How might you show that the main purpose of your trip was for business, if you're questioned? "You should keep the conference schedule," says Torella. "Also, keep any records showing that you had business-related conversations with other people. There might have been a prospect that you took out for a meal, for example."
2. Track your meal and lodging costs.
Meal costs are 50% deductible while you're away from home. According to the tax code, every bite or sip is half business and half pleasure. What about your hotel costs, which might be substantial? "You can deduct the costs of staying at a hotel during the conference," says Torella, "and you could argue for deducting the cost of a hotel stay the night before or after the conference. If you extend your stay, though, for personal reasons, you probably should deduct the hotel costs only for the business days."
Better yet, if you have legitimate business to conduct on a Friday and Monday, you can write off your living costs for the weekend in between, even if you spend Saturday and Sunday playing golf. The weekend deductions can be justified on the grounds that you're too far away from home to make it practical to travel back and forth over the weekend.
Even if your business winds up on a Friday, some weekend lodging and meal expenses may be deductible if the extra stay is intended to take advantage of lower airfares for staying a Saturday night. The IRS has ruled that the extra living expenses can be deducted if they were less than the airfare savings.
3. Deduct business-related expenses for your spouse.
What if you travel to a conference with your spouse? "If your spouse is an employee of the company, and has a business purpose for attending the conference, spousal expenses will be deductible," says Torella. "Otherwise, you can't deduct your spouse's travel expenses.
"Your hotel and half your meal expenses probably can be deducted, though," says Torella. "You're supposed to separate the costs of one person attending, but in practice that's hard to compute, so it's usually not done."
You may find it difficult to entertain a business associate without your spouse when you're both on the trip. So if you take a client or prospect out to dinner, with spouses, your expenses normally will be deductible.
4. Conduct business in locations you love.
You don't have to find a conveniently located business meeting to mix business with pleasure travel. Instead, line up several business meetings in an area that has pleasurable pursuits.
Say you want to go sightseeing in Seattle this summer. Compile a list of customers, prospects, suppliers, referral sources, and other business contacts in that area.
Before you go, arrange a schedule of business meetings. Keep a log of those meetings and send follow-up correspondence. The more time you spend on business, the greater the portion of your trip you can deduct.
5. Have fun time on the IRS's dime.
Business travel often includes entertaining clients, which could include taking business guests to restaurants, theaters, and so on. Business entertainment, however, is usually 50% deductible, not 100%.
You should be aware that the IRS feels that entertaining in certain places is not conducive to doing business. That principle applies to nightclubs, theaters, sporting events, casinos, and cocktail parties.
Say you take a client to a baseball game. The IRS might say the atmosphere was too noisy and hectic to carry on any meaningful business discussions. Still, you can take someone to a ball game (or anywhere else) and take a 50% deduction for tickets, parking, refreshments, etc., if you comply with the so-called "associated" test.
"Under this rule, you can deduct expenses for entertainment that takes place before or after a business discussion," says David Kahn, managing director of American Express Tax and Business Services in New York. So you can spend an hour with a prospect discussing your company's product line and then take him to a ball game. A legitimate deduction could be claimed for half the expenses incurred as long as both you and the client attend the event.
Entertainment doesn't have to take place on the same day as the business discussion in order to be deductible as long as you can show why it wasn't done on the same day. You might, for example, entertain out-of-town clients the evening they arrive and have a business meeting the next day. Half of your entertainment costs will be deductible.
Other types of entertaining may be deductible, too. Say you throw a picnic each year on Labor Day. To get deductions, you must prove that your picnic had a purpose of obtaining or maintaining business. However, if you invite some of your friends and family to a barbecue that's primarily for co-workers and professional associates, you can deduct only the costs that pertain to your business guests.
6. Deduct expenses for maintaining business property.
What deductions can you make for trips to maintain your rental property away from home? It depends. Say you live in Ohio and own a rental condo in Florida. You can deduct the cost of trips to Florida to maintain your investment.
"I would not advise taking deductions for a trip in season," says Kroner. If your tax return is examined, the IRS might be skeptical of a "maintenance visit" to Key West in February.
Such trips are easier to justify before or after the season. You might spend a week fixing up your Florida condo in July, taking the time to meet with your rental agent. You probably can deduct your air travel, car rental, dining, and incidental expenses, as long as you keep good records.
Expenses directly related to business meetings will be deductible, too, for gatherings of employees, shareholders, directors, or agents. If your key executives meet at your beach house, you can write off the expenses involved with the meeting. "If you have a second home," says Kahn, "consider renting it to your company for a meeting or a retreat. Your company can deduct this cost while you're allowed up to 14 days' worth of income, tax-free, each year, from this type of rental."
7. Be aware of different rules for traveling abroad.
If you travel outside the United States, the rules are more complicated. Generally, the full cost of getting to and from an overseas destination can be deducted (1) if your trip lasts no more than a week, or (2) if you spend less than 25% of the time on vacation. Otherwise, your travel costs must be allocated between business and personal expenses.
8. Keep reliable, easily accessible records.
The mechanics of paying for any travel and entertainment expenses may be important, too. "If you're employed by your corporation," says Torella, "the best approach may be to have the corporation pay these costs directly. If you pay the costs and get a reimbursement from your company, you should present an itemized expense report for the reimbursement. Otherwise, some reimbursements might be characterized as taxable income." If you merely pay the expenses yourself and take the deductions on your own return, you might run into the limits on employee business expense deductions.
Such deductions are classified as miscellaneous itemized deductions. Most miscellaneous itemized deductions, including tax preparation and investment-related expenses, are subject to a 2% floor. You add them up and deduct the amount that exceeds 2% of your adjusted gross income (AGI).
No matter how you arrange your affairs, though, you should try to keep records of all your travel and entertainment expenses. Maintain a diary that shows where you went, what you did, the names of the people you entertained, their business relationship to you, and the nature of the business discussions that took place. Indicate the business benefit you hoped would result. In case you're ever questioned, you want to have some evidence that your travels were in pursuit of profits, not just fun in the sun.