TIP #8: Turning Your Travel Into Tax-Deductible Expenses
One of the huge advantages of being in a high demand business, such as real estate, network marketing, or travel is that you can get customers almost anywhere. With a little planning and proper documentation, you could deduct trips anywhere in the world.
There are two types of travel days. The days you are actually traveling, and the business days in the middle. Both can qualify you for some deductions, but there are some rules and definitions you need to understand first.
Two Types of Travel Expenses
When you are traveling, there are two types of expenses: 1. living expenses which we call “on the road expenses”; and 2. actual “transportation” expenses (like airfare). To find out if your travel expenses are deductible, we need to first understand a few terms.
On the road expenses
These types of expenses are the costs involved in sustaining life (like food and shelter). These costs are deductible, ONLY if you are either on “travel status” and/or having a “business day” while on your trip.
You can consider it a business trip if you are sleeping away from your home for a business reason or for a period of time sufficient to require sleep.
IRS says that if you conduct business and are meeting with someone for a bona fide business reason, the whole day is a business day regardless of the time spent.
Thus, if you are meeting with a client or prospect, the whole day will be considered a business day even if the meeting takes only an hour or two.
Business Day Exceptions
Convention or seminar days have one more requirement. If the purpose for your trip is a convention or seminar then you MUST attend meetings for 4 hours and one second for that day to be considered a business day.
Weekends can be considered business days if you sandwich business days before and after the weekend. Thus, if you have a business day on Friday and one on Monday then Saturday and Sundays are considered business days no matter what you do on the weekend.
Alternatively, if you can show you stayed over a Saturday night in order to save on airfare you can consider the weekend business days. The only thing is that you have to prove that the extra cost for your room and board was less than what you would have spent on travel if you didn’t stay the weekend.
What Can You Deduct When Your Day Qualifies as a “Business Day?”
You can deduct 50% of your food costs. You can also deduct 100% of your lodging, shoeshines, laundry and dry cleaning for each day that you conduct business.
Assume that you live in Washington DC and fly to New York City in the morning for a meeting and return that evening. You are NOT deemed to be on travel status since you didn’t stay overnight on business. On this trip, you would only be allowed to deduct your transportation and not the on the road expenses like food.
However, if you had flown to New York City and then caught a return flight the next day, you would qualify to deduct all your on the road expenses like food.
Required Documentation for a Business Day
You must show that you had a pre-arranged meeting at a pre-arranged destination with someone that qualifies your day as a business day.
Thus, you should keep a paper trail such as emails or letters establishing that your intent for the trip was business. You are also required to document that the meeting happened and what was discussed.
Taxbot Makes It Easy: With Taxbot you can record that you had your meeting as well as what was discussed by just adding an expense or an appointment and answering the IRS questions the app asks.
Note: Taxbot doesn’t prove that you had the meeting set up in advance, so you may still need to provide proof in an audit. Keep your emails!
Although I generally recommend keeping all receipts for travel, the IRS doesn’t require receipts for expenses under $75 per day (with the exception of overnight lodging expenses).
The actual cost of the transportation such as airfare, taxis, rental cars, etc. can be deductible.
I want to make one point clear, in order to deduct any transportation your primary purpose for the trip must be for business. This is where the “rubber meets the road.” You can have some incidental personal reasons for going on your trip, such as seeing your mom, but the primary purpose must be for business.
This requires several items of proof, but the main requirement is that you have business appointments set up BEFORE you go on your trip! You can always add some later on, but you must have some preexisting appointments.
Transportation Costs for U.S. Business Trips
If your primary purpose for the trip was for business, you can deduct all of your transportation costs if more than 50% of the total days away from home qualify as business days. If you don’t meet this criteria then you don’t get a deduction for the transportation!
Foreign Travel Transportation Expenses
Looking to get out of the country? Deducting those expensive airplane tickets could save you a lot of money. It’s like getting discounted airfare! But as always, planning is the key. Part of the planning depends on how long your trip is.
Trips less than 7 days
If your trip is less than one week and you are back in the U.S. in less than 7 days, including the days you are traveling, then you may deduct 100% of the transportation costs even if you have only one business day where you actually do work!
This is known as the exciting one-week loophole that many tax professionals don’t even know.
Trips longer than 7 days
Is your trip longer than a week? If your “business days” represent 75% or more of the total trip time then you can deduct 100% of your transportation costs.
The final option
If you fail to meet either one of the above options, your transportation costs are deductible based on the percentage of business days. For example, if your trip was 10 days but only 3 days were business days, then 30% (3/10) of the transportation costs can be deductible.
Convention or Seminar Trips
If you are on a trip for a convention or seminar, the deduction rules will depend if the convention or seminar is outside a “defined North American area.” This includes anywhere in North America. In addition this also includes:
- Costa Rica
- Saint Lucia
- Marshall Islands
- Johnston Island
- Jarvis Island
- Kingdom Reef
- Federated States of Micronesia
If you attend a convention within these areas and you spend over 50% of your total days qualify as business days then 100% of the transportation costs would be deductible.
If, however, you are attending conventions or seminars outside of these areas, in addition to meeting the tests in the foreign travel rule, you must have a “reasonable basis” for meeting in this area.
Thus, if all the U.S. distributors of a company meet in France, it probably wouldn’t be reasonable to meet there since they do their business in the U.S. However, if there is a worldwide meeting including European distributors, then meeting in France might qualify as reasonable.
Special Types of Trips that Can Result in Business Days
The IRS says that if you visit colleagues to improve your skills or set up referrals, the trip could be for business.
In addition, any education for your business would be deductible, anywhere in North America, even if you can take the same course where you live. You don’t need to take the course where you live.
Moreover, job-hunting trips are deductible as long as you are looking for a position in the same trade or business that you are in.
If you are in the travel business and are legitimately trying to sell travel and/or cruises and can fully document your sales efforts, you may be able to deduct “familiarization trips” otherwise known as “fam trips.” However, you must really be selling travel, or vacation packages or cruise trips to customers in order to take advantage of this. The more you retail these packages, the better your argument that you need to take a “fam trip” in order to recommend these to you customers.
For More in Travel Tax Information
This should give you a great overview of the travel rules. For more in-depth information, visit the Education Library in your online account at www.taxbot.com or get my audio or video series, “Tax Strategies for Business Professionals” or get my book, “Lower Your Taxes: Big Time.”