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| The Basics | Take a working vacation -- and a deduction
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The IRS says you can deduct expenses for taking a business trip or business convention. And theres no reason the trip shouldnt coincide with your vacation.
By Jeff Schnepper
Pack a laptop with your bathing suit on your next vacation.
There is no law prohibiting you from combining a business trip with a vacation. And if you do mix and match, dont forget to keep your receipts.
The Internal Revenue Service concedes that youre entitled to deduct expenses for taking a business trip or attending a business convention. While such trips must benefit or advance your business to qualify for a tax deduction, theres no reason why the trip or convention couldnt coincide with your vacation. Why do you think that most large conventions are held in cities like New York, Las Vegas and Miami?
Whats involved
Convention and business travel expenses are deductible both to employees and the self-employed. The expenses can include convention fees, hotels, meals and entertainment, and travel expenses to and from the convention. If a business purpose can be established, the expenses of your spouse may also be deductible. The business conventions or seminars must specifically relate to your business or profession. This rule could be called the resort investment seminar rule.
While you can deduct seminar and convention costs so long as they relate to your profession or business, the IRS doesn't allow you to deduct the expenses for attending an investment or financial planning seminar in a resort area -- or, say, a cruise ship. Likewise, you can't deduct the costs of attending an annual meeting of stockholders if you're a shareholder. The IRS considers going to an annual meeting to be personal business.
Rules vary on domestic, foreign travel
The deductibility rules differ depending on whether the trip is within or outside the United States, and whether its a foreign convention or a cruise convention. Lets have a look at each.
The trip is in the United States
Your transportation expenses will be deductible only if the trip is primarily for business. If the trip is primarily for pleasure, no transportation expenses can be deducted. This means that you have to establish a primary business motive for making the trip. An example: Youre going to attend a convention in that city or visit a client or potential client who is based there.
If youre going to visit a client, I recommend writing to this person first and receive in return a letter confirming the planned visit to discuss business matters. That letter validates the business purpose of your trip.
The amount of time that you spend on business will be a factor in answering whether the trip is mostly for fun or work. Here's what we mean:
- If you spend five days conducting business and three days sightseeing and seeing shows, the trip will be considered primarily for business and all of your transportation costs will be deductible.
- If you conduct business for two days and enjoy the sites for the remaining six days, the trip will be considered primarily personal and no transportation expenses will be allowed. Its important to recognize that travel days count as business days in the primary computation.
Even if the trip is mostly personal, any expenses you incur that are mostly business-related -- meals, lodging or incidental expenses, for example -- can be deducted.
If the trip is outside the United States
For the IRS, outside the United States includes Canada, Mexico, the Pacific Islands and certain Caribbean countries. Here, special allocation rules apply. If you are out of the country for seven days or less, or if less than 25% of your trip is spent enjoying the scenery, you dont have to follow the special allocation rules. Furthermore, no allocation is required if you have no substantial control over the trip arrangements and if the desire for a vacation is not a major factor in taking the trip.
Alternatively, if the trip is primarily for pleasure, none of the transportation expenses will be deductible. In all other cases, all travel expenses must be allocated between business and personal expenses (with travel days counting as business days).
Lets say you travel from New York to London primarily for business purposes. You're away from home from July 20 through July 29 and spend three days vacationing and seven days conducting business (including two travel days). We'll say your airfare is $500 and your meals and lodging amount to $75 per day. (A deal, I know.)
You can deduct 70% of your transportation expenses (seven out of 10 days) and $75 per day for seven business days. That's because you are away from home for more than seven days and more than 25% (three out of 10 days) of your time was devoted to business. (Remember that only 50% of your meals are deductible.)
If your trip is subject to the allocation rules, there is a planning strategy to maximize your tax deduction. When booking your flight, if you can, arrange for a stopover within the United States at the point closest to your destination. That way, the portion of the trip between your home and the stopover point will be fully deductible. You will then only have to allocate the cost of the remainder of the trip.
Foreign conventions
More restrictions are imposed on foreign conventions. No deduction is allowed for expenses attributable to a foreign convention unless it is reasonable for the convention to be held outside North America. In other words, you cant deduct the trip if you cant show it had to be over there rather than over here. Note that were only talking about conventions. These rules dont apply to other foreign business meetings. Three factors are considered in determining the reasonableness of the convention location:
- The purpose of the meeting and the activities taking place at the meeting.
- The purpose and activities of the sponsoring organization or group.
- The residence of the active members of the group and where prior or future meetings will be held.
While there is no limit on the number of foreign conventions/vacations you can attend and deduct on your taxes, the rules change if you try to do it on cruise ships. Uncle Sam has a hard time understanding how serious conventions are when held aboard luxury cruise liners, unless:
- The convention or meeting is directly related to your trade or business;
- The cruise ship is U.S. registered;
- All ports of call are located in the United States or its possessions.
Even then, the maximum deduction is $2,000 per year for each taxpayer, and you must attach two written statements to your return. The first statement, signed by you, must include information on how many days that were devoted to scheduled business activities. The other, signed by a representative of the sponsoring organization, must include a schedule of the business activities each day, and the number of hours you were in attendance.
Remember that the key to deducting your vacation as a business expense is prior planning. Make sure that you can substantiate your business purpose for the trip and your expenses. Properly planned trips that combine business with pleasure will allow you to deduct the cost -- or at least a portion of your cost -- for nearly everything you do.
I have found that perhaps the easiest way to maintain a record to prove you really did work on that trip to Tahiti is to keep a diary or account book of such expenses. After all, if youre in the 25% bracket for 2004 or 2005, a $10,000 business and vacation trip would be subsidized by the IRS to the tune of $2,500!
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