One of the perks of being a small business owner is the tax deductions you can take advantage of, including writing off trips and vacations. You just need to know your motives before you go!
To begin, you need to understand your trip needs to have a business purpose for it to be eligible as a tax deduction. The key element to writing off your trip is that its primary purpose is business.
When it comes to business trips—and all business expenses—the IRS requires your trip to be both ordinary and necessary to be deductible.
In IRS lingo, ordinary means it’s an expense “that is common and accepted in your business,” while necessary means “an expense that is helpful and appropriate for your business.”
Keeping those ideas in mind, here are some key tips for writing off your vacation.
Common Business Activities That Require Travel
Common business activities that you should consider on your trip include:
- Attending a convention or seminar: Take a look at the calendar and see if there is a convention or seminar that would be beneficial for you to attend in an area where you can also enjoy some needed rest and relaxation.
- Meeting with clients, partners, or potential customers: As you are traveling to new destinations, consider the customers, potential clients, or partners you might have in the area. Set up times to meet with them to gain new insights for your business.
- Meeting with vendors: Research the area to see if there are any vendors or potential vendors or partners you would want to meet with. Then, set up appointments in advance.
- Conducting business research: This can be a bit of a grey area, so make sure your reasons are sound. As you prepare for a trip, see if there are any research opportunities you can take advantage of in that area. Traveling to Hawaii just to do some research on Google will not be a compelling enough justification in case of an IRS audit. Scoping out a local market, meeting with researchers, or taking advantage of resources specific to that area will create a much stronger case.
Business Expenses That Are Tax-Deductible
Business expenses that are tax-deductible include:
- Plane tickets
- Rental cars
- Taxis or other transportation expenses
- Research expenses
- Employee expenses
- Hotel rooms or other accommodations
- Business activities
It’s best if you pay for these expenses using your business bank account to avoid comingling your accounts. That way, all your trip expenses are in one place and easy to find. However, if you do pay for some things with a personal card, you can still get the tax deduction. Just make sure to keep good records and keep track of your receipts and notes in case of an audit.
The IRS has several requirements that each small business owner must abide by to write off a business trip, including:
- Majority: The majority of the days of the trip must be business-related. However, it’s important to note business days include weekends, travel days, convention or seminar days, and days you meet with clients or conduct research.
- Planning: Make sure conventions and appointments are planned in advance and meetings with vendors are scheduled. This will help demonstrate the intention of your travel was business. Save emails or documents that could help demonstrate this in case of an audit.
- Documentation: Save all your receipts over $75.00 and any lodging expenses (even under $75.00).
- Notes/minutes: Hang onto brochures or keep notes of business meetings. These will provide proof that you attended these business activities during your travels.
- Reasonable: Keep in mind that all expenses need to be reasonable to write-off. The main write-offs include travel (plane tickets, rental cars, gas, taxis, etc.), accommodations (hotel rooms), employee expenses, business activities (conventions, seminars, employee activities, etc.), and meals (groceries, restaurant receipts, etc.).
So you’re probably wondering, “Where does the vacation come in?” Let’s look at an example:
Enjoying Vacation with Business
If you wanted to visit a friend in Chicago and stay for a few days, take a look at your schedule. You could travel by plane on Thursday (business day), attend a seminar Friday (business day), and visit your friend on Saturday (business day) and Sunday (business day) since weekends are automatically considered business days. You could them take Monday, Tuesday, and Wednesday for vacation days before traveling home Thursday (business day). The majority of the days were considered business days and all your flights, meals, and accommodations are deductible.
- 2 Travel Days = Business Days
- 1 Seminar Day = Business Day
- 2 Weekend Days = Business Days
- Mon-Wed = Vacation Days
4 Business Days + 3 Vacation Days = Business Trip
Taking Your Family on a Business Trip
What happens if you take your family on a vacation but still attend business activities? Do you miss out on all the tax deductions?
If the trip still meets the criteria above, you can still take advantage of writing off your trip, but calculating the write-off might be a little trickier. For example, you can write off your plane ticket but not your family’s plane tickets.
Here are the expenses you can still write off:
- Your hotel room or accommodations
- Your rental car, gas, and transportation
- Your plane ticket
- Your portion of the meals
- Convention or seminar passes and expenses
- Research expenses
- Employee expenses
- Business activities
Other expenses you can’t write off include:
- Family or friend plane tickets
- Family or friend meals
- Family or friend additional hotel rooms or accommodations
- Excessive expenses
Again, it’s best if you can pay for business expenses with a business card, so separate restaurant checks or buy plane tickets separately where possible.
What if a family member is an employee?
If a family member is an employee and goes on the trip with you, you can write off their travel expenses as long as they attend and contribute to planned business activities. For example, they could attend the convention or seminar, participate in business conversations with clients, engage in research, etc.
This goes back to the discussion about ordinary and necessary. Would it be commonly accepted for a business in your line of work to send multiple employees to an event like this? Is it helpful and appropriate for your business? If so, then you can write off both of your expenses.
Common Mistakes to Avoid
Now that you know the expectations for a business trip and the expenses you can write off, let’s review a few common mistakes small businesses make when trying to take a tax deduction on a trip:
- Not having a strong business tie or plan ahead of time.
- Not keeping receipts, travel plans, business notes, brochures, and other documentation.
- Not using a business bank account to track business expenses. Again, you can still write off expenses paid with your personal account, but this is not ideal.
- Trying to write off expenses that are excessive and unnecessary. This can raise a red flag for the IRS.
- Not taking advantage of the fact that weekends are automatically considered business days, whether or not you conduct business activities on those days. Extend your trip to include weekends if you want to enjoy a little extra vacation time!
Instead of thinking, “how can I write off my vacation?” think “how can I add a vacation to my business trip?” As a small business owner, you want to save money, and what better way to save than planning a trip around your business!
If you have additional tax tips or questions, reach out to our team today or sign up for a 30-day free trial with Mazuma! We are here to save you time, money, and stress by handling your small business bookkeeping and taxes.