It is perfectly legal to deduct your next vacation. Here’s how to do it.
To qualify for this deduction, you must meet the following two criteria:
1. You are self-employed or own a small business;
2. On your next trip, you combine business with pleasure.
The first requirement is pretty cut and dried. By “small business” we are including any type of self-employment activity, full-time or part-time, home-based or “bricks and mortar”. This deduction applies to any type of small business entity: sole proprietorships, partnerships, corporations, and limited liability companies.
The second requirement is somewhat trickier and will be the focus of this post.
To deduct any U.S. trip, you can combine business and pleasure, but the primary purpose of the trip must be business. And here’s how the IRS defines a trip taken primarily for business purposes: the number of “business days” must be greater than the number of “personal days”. To complete the definition, travel days are considered “business days”.
Here’s an example to clarify the rules: You take a 10-day “vacation” to Orlando. You spend one day getting there and one day getting back. You spend four days attending a seminar. The other four days are spent with Mickey Mouse & Company.
Let’s tally up the days:
Business Days = 6 (2 travel days + 4 seminar days)
Personal Days = 4 (doing theme parks)
So, are the number of business days greater than 50% of the total days? Yes. So here’s what you get to deduct: 100% of your transportation expenses (even though 40% of your days were personal days) and 100% of your “on-the-road” expenses for the six business days, including hotel bills, cab fares, rental car, seminar fees, dry cleaning, laundry and meals.
Keep in mind that the meal expenses are still subject to the 50% rule. In other words, when we say that “100% of your on-the-road expenses” (including meals) for the business days are deductible, the actual amount of the meal deduction will be 50% of the meals cost.
Also realize that transportation expenses include air fare to and from your destination (if you take a plane). If you drive to the vacation spot, you can deduct the actual cost of gas or take a deduction based on the current IRS-approved mileage rate.
The on-the-road expenses for the four personal days are not deductible. But you’re still getting a great tax break here. Assuming you spend $1,000 for transportation and the six business day expenses, a sole proprietor in the 35% tax bracket (15% federal tax + 15% self-employment tax + 5% state tax) saves $350.
Before you take your next trip, do some planning to include business activities and let Uncle Sam help you pay for it.