How to Take a (Tax-Deductible) Vacation From Your Small Business

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As a hardworking business owner, it’s important to recharge your batteries from time to time. A business vacation could be just the ticket. You can reduce the cost of mixing business with pleasure when you take tax deductions for travel expenses.

Once upon a time, writing off business travel was easy. Those days may be gone, but tax deductions are still possible under the right circumstances.

What Qualifies as a Business Trip?

The major factor that determines whether you can take tax deductions for travel expenses is the primary purpose of the trip, according to the IRS. If the main reason for your trip was business-related, then you can write off the cost of traveling to and from your destination, along with your hotel bill and meals associated with the period of your trip that was business-related.

For example, suppose you flew to San Francisco for a seven-day business vacation and spent five of those days meeting with customers and sales prospects. You can deduct your airfare and hotel for those five days, but you won’t be able to deduct the extra two nights in the hotel and other expenses you incurred for the nonbusiness part of your trip.

Owner working outside on a business vacation with mountains behind him

How Much Can You Deduct?

Business vacation deductions for travel expenses can get complicated. What if your spouse (who does not work in your business) accompanied you on your trip to San Francisco? You would not be able to write off your spouse’s expenses. However, remember that your spouse is sharing the financial benefit of your tax-deductible (and therefore less expensive, after-tax) hotel room.

What if your spouse and three children accompanied you on this trip? And suppose that, because of your group’s size, you rented a suite instead of an ordinary hotel room. In this situation, your deduction for the hotel expense would probably be limited to whatever rate you would have paid for an ordinary room.

In some situations, the extent of tax deductibility comes down to a judgment call. The IRS, when reviewing deductions for travel expenses, considers what it calls the “facts and circumstances.” Another important phrase the IRS uses is “ordinary and necessary.” That’s the IRS standard for deciding whether to challenge your deduction.

For example, suppose on your routine, solo business trips you stay at standard business hotels in standard rooms. If you stay in a luxury suite while on a business vacation with your spouse, you might have a problem with the IRS if you try to deduct the entire amount.

Partial Trip Deductions

If a business vacation is more vacation than business, you might still be able to take some deductions. Suppose on that trip to San Francisco you spent five days riding cable cars and eating seafood at Fisherman’s Wharf, and two days visiting suppliers and sales prospects. The expenses you incurred in conjunction with seeing those people, such as traveling to and from their place of business back to San Francisco, should be deductible. Deductible travel expenses might also include renting a car and a hotel room if those customers were too far away from San Francisco for you to make it to your appointments on time.

International Trip Deductions

Tax deduction requirements can be less stringent when you’re on an international trip. According to the IRS, even if you don’t spend the entire trip on business, it will be considered a business trip (for to-and-from travel deduction purposes) if you satisfy any of the following tests:

  • You were outside the U.S. for no more than seven consecutive days, including both business and nonbusiness activities.
  • You were outside the U.S. for more than a week, and you spent less than 25% of your time on nonbusiness activities.
  • Vacation was “not a major consideration” in your decision to take the trip. (It’s up to you to decide how to prove that, if challenged.)

If you don’t qualify under any of those tests, but your international trip still has a business purpose, you can deduct the amount of your to-and-from travel expenses for the days you spent on business.

Documentation Requirements

Wherever you travel, documentation is your friend. As with other expenses, you’ll need to keep receipts to support your write-offs when you sit down with your tax professional to prepare for your tax return filing. Also, with a business vacation, it helps to have some evidence that your trip was planned, and not just taken on a whim, particularly if the trip was to a “fun” location.

With all these facts in mind, try mixing in a little vacation time on your next business trip. You’ll still likely receive some tax deductions, and you can put those savings toward some well-deserved relaxation.

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