A column on personal finance prepared by the Virginia Society of Certified Public Accountants
TAX IMPLICATIONS OF COMBINING BUSINESS AND VACATION TRAVEL
(June 18, 2003) – If you’re thinking of combining business with pleasure by adding a few days of vacation to your business trip, the Virginia Society of CPAs urges you to take the time to understand the tax implications. While tax law allows deductions for the business portion of your trip, you must bear the burden for personal expenses. Be aware, too, that Internal Revenue Service (IRS) rules differ depending on whether your destination is domestic or foreign. Here’s what CPAs say you should know before finalizing any reservations:
Deducting Domestic Trips
When traveling within the U.S. and mixing business and personal activities, you can deduct 100 percent of travel expenses to and from the destination if the trip is primarily related to your business. Lodging, 50 percent of meal costs, and other qualified business expenses also are deductible for the days you spend on business, but only to the extent that they would have been incurred if the trip had been totally for business.
There are no hard and fast rules for determining whether your trip is primarily for business or pleasure. However, CPAs typically agree that the determining factor is how much time you spend on each activity. For example, if you spend six days on business and three days vacationing, you may deduct the full cost of getting to and from the business destination, even if you spend the last three days on the beach. Travel days count as business days when making your calculation.
Reverse the allocation between business and pleasure (three days on business and six on pleasure) and none of your travel expenses would be considered deductible. However, you could write off any expenses you incur at your destination that would qualify as business deductions. If, for example, while you and your family are vacationing in California, you take a customer out to lunch to discuss business, your transportation to and from the customer’s office and 50 percent of the meal cost would qualify as a deductible business expense.
When staying over on Saturday night results in a lower airfare and net cost savings, you may deduct 50 percent of meal costs, lodging, and other business related expenses incurred for the additional night. This is because the stay over has a business purpose of cutting travel costs.
When Business Takes You Abroad
When your destination is on foreign shores, you must allocate your travel expenses in proportion to the number of days you spend on business and personal activities. However, several exceptions to this rule apply when traveling abroad.
First, you don’t have to follow the allocation rule if you were out of the country for seven days or less (not counting the day you left the U.S., but counting the day you return to the U.S.). That means you can fly to London for a four-day meeting and sightsee for two days, and your travel expenses are deductible.
The allocation rule also does not apply if you were out of the U.S. for more than a week, but spent less than 25 percent of your time on non-business activities. (In this case, both the day of your departure and the day of your return count as business days.) Additionally, you’re exempted from the allocation requirement if you had no substantial control over the arrangement of the trip.
In the event you don’t meet these requirements, tax law requires that you allocate your travel costs between your business and personal activities to determine the deductible amount.
When Family Joins You
Pack the family into the car for the business/vacation destination, and you can deduct the total cost of driving back and forth. Tax law recognizes that you would have incurred the same expenses if you were traveling alone and, therefore, allows the deduction. If you fly to your destination, only your airfare is deductible. When you share your hotel room with family members, you may deduct the cost of what you would have paid for a single, rather than double, room. Typically, this is more than half the cost. For example, if the hotel charges $160 for a double and $140 for a single, you could deduct the single rate of $140, rather than half the double rate ($80). Just be sure to ask the hotel to note the single rate on your bill.
Recordkeeping Is Key
Keep in mind that the IRS pays close attention to deductions claimed for business travel. CPAs recommend that you maintain a log to substantiate your business activities. Include the dates of departure and return, the number of days spent on business, and the reason for the travel. You also may want to consult with a CPA in advance of your trip to determine your eligibility for certain deductions.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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