Let’s assume you are an employee or business owner going on a business trip. Wouldn’t it be great if you could combine a mini-vacation with the business trip and write off your personal expenses? Although taxpayers are not allowed to deduct their personal vacation expenses as a business expense, they may be able to benefit financially by combining their business and pleasure trips. Business owners (and employees) who travel for business reasons may enjoy a travel bargain by piggybacking a vacation with an out-of-town business trip. For purposes of this discussion, I have assumed that Mr. Prudent is a business owner. The tax benefits discussed herein can also apply to employees if the employer has an accountable reimbursement plan.
Let’s look at a couple of scenarios.
Mr. Prudent decides to travel to New Orleans for a three-day business meeting with one of his major customers. Because he has never been to Mardi Gras, Mr. Prudent decides to spend another two days in New Orleans to enjoy the festivities. Since the trip was made primarily for business reasons, Mr. Prudent can deduct 100% of the airfare and the cost of his lodging plus 50% of his meals during those three business days. The cost of his lodging and meals during the two days spent as vacation are not tax deductible. Mr. Prudent is receiving a tax-free perk in that he gets to deduct his entire airfare as a legitimate business expense. In other words, he receives a “free ride” to New Orleans for Mardi Gras.
Let’s now assume that Mr. Prudent’s business activities ended on Friday and he extended his business trip to take advantage of a low-priced airfare requiring a Saturday night stay-over and a return flight on Sunday. He is able to substantiate that the savings in airfare are higher than the costs of the weekend meals and lodging. He spends all day Saturday enjoying Mardi Gras at his company’s expense. He doesn’t pay income tax on the reimbursement for his Saturday meal and lodging expenses. Although Mr. Prudent only got to spend one day at Mardi Gras, his Saturday expenditures are 100% tax deductible.
What if Mr. Prudent desired to spend the entire weekend enjoying Mardi Gras at his company’s expense? Although those customer meetings ended on Friday, he found it necessary to meet with a major supplier on the following Monday. The cost of his lodging and meals over the weekend were less than the cost of airfare to fly home and back to New Orleans. Using “prudent” business practices, Mr. Prudent decided to extend his stay in New Orleans until Monday and claim 100% of his weekend expenditures as legitimate tax deductions.
The personal part of a trip need not occur at the business destination. It can take place on the way home from the business destination or en route to the business destination. Let’s assume that Mr. Prudent, rather than spending another two days in New Orleans, decides to spend those two days traveling from New Orleans to visit with family in Texas before returning to his home in Harrisburg, PA. If the round-trip airfare to New Orleans was $1,500 and Mr. Prudent’s airfare from Harrisburg to New Orleans to Texas to Harrisburg was $2,000, he should be able to deduct $1,500 as a legitimate business expense.
Mr. Prudent decides that his wife would also enjoy Mardi Gras and wants to write off her airfare, lodging, and meals. The expenses of another companion accompanying a traveler aren’t deductible unless (1) the companion is a fellow employee of the taxpayer and travels for a bona fide business purpose, and (2) the expenses would otherwise be deductible by the companion. Mrs. Prudent does not meet those tests. The Prudents may still enjoy a tax advantage because the business deduction is not limited to 50% of the expenses incurred, but on what it would have cost Mr. Prudent if he had traveled alone. If Mr. Prudent’s hotel room would have cost him $200 a night as a single occupant, and the cost of another occupant increases the room price to $250, he is allowed to deduct the $200 per night cost as a business expense.
One of the tests that determine if the cost of travel is tax deductible is whether the trip was undertaken primarily for business purposes. While it is beyond the scope of this discussion to discuss the “primarily for business purposes” test, one of the factors that the IRS looks at is the number of days spent on business versus the number of days spent for personal pleasure.
As with any tax deduction, the taxpayer is required to document the reason for the business trip and the business activities and provide receipts to support the tax deductions claimed. Since the business deductions are often determined by examining the facts and circumstances, it is important to consult with a competent tax advisor before the business trip to maximize those tax deductions.
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