As a Milwaukee Business owner, you may want to take a vacation. But did you know that you can turn your vacation into a tax deduction legally?
Turn Your Vacation Into a Tax Deduction
Tim,
who owns his own business, decided he wanted to take a two-week trip
around the US. So he did--and was able to legally deduct every dime that
he spent on his "vacation". Here's how he did it.
1. Make all your business appointments before you leave for your trip.
Most people believe that they can go on vacation and simply hand out their business cards in order to make the trip deductible.
Wrong.
You must have at least one business appointment before you leave in
order to establish the "prior set business purpose" required by the IRS.
Keeping this in mind, before he left for his trip, Tim set up
appointments with business colleagues in the various cities that he
planned to visit.
Let's say Tim is a manufacturer of green office products looking to
expand his business and distribute more product. One possible way to
establish business contacts--if he doesn't already have them--is to
place advertisements looking for distributors in newspapers in each
location he plans to visit. He could then interview those who respond
when he gets to the business destination.
Example: Tim wants to vacation in
Hawaii. If he places several advertisements for distributors, or
contacts some of his downline distributors to perform a presentation,
then the IRS would accept his trip for business.
Tip: It would be vital for Tim to
document this business purpose by keeping a copy of the advertisement
and all correspondence along with noting what appointments he will have
in his diary.
2. Make Sure your Trip is All "Business Travel."
In order
to deduct all of your on-the-road business expenses, you must be
traveling on business. The IRS states that travel expenses are 100%
deductible as long as your trip is business related and you are
traveling away from your regular place of business longer than an
ordinary day's work
and you need to sleep or rest to meet the demands of your work while away from home.
Example: Tim wanted to go to a
regional meeting in Boston, which is only a one-hour drive from his
home. If he were to sleep in the hotel where the meeting will be held
(in order to avoid possible automobile and traffic problems), his
overnight stay qualifies as business travel in the eyes of the IRS.
Tip: Remember: You don't need to live
far away to be on business travel. If you have a good reason for
sleeping at your destination, you could live a couple of miles away and
still be on travel status.
3. Make sure that you deduct all of your on-the-road -expenses for each day you're away.
For
every day you are on business travel, you can deduct 100% of lodging,
tips, car rentals, and 50% of your food. Tim spends three days meeting
with potential distributors. If he spends $50 a day for food, he can
deduct 50% of this amount, or $25.
Tip:The IRS doesn't require receipts for travel expense under $75 per expense--except for lodging.
Example: If Tim pays $6 for drinks
an the plane, $6.95 for breakfast, $12.00 for lunch, $50 for dinner, he
does not need receipts for anything since each item was under $75.
Tip: He would, however, need to
document these items in your diary. A good tax diary is essential in
order to audit-proof your records. Adequate documentation shall consist
of amount, date, place and business reason for the expense.
Example: If, however, Tim stays in
the Bates Motel and spends $22 on lodging, will he need a receipt? The
answer is yes. You need receipts for all paid lodging.
Tip: Not only are your on-the-road
expenses deductible from your trip, but also all laundry, shoe shines,
manicures, and dry-cleaning costs for clothes worn on the trip. Thus,
your first dry cleaning bill that you incur when you get home will be
fully deductible. Make sure that you keep the dry cleaning receipt and
have your clothing dry cleaned within a day or two of getting home.
4. Sandwich weekends between business days.
If you have a business day on Friday and another one on Monday, you can deduct all on-the-road expenses during the weekend.
Example: Tim makes business
appointments in Florida on Friday and one on the following Monday. Even
though he has no business on Saturday and Sunday, he may deduct
on-the-road business expenses incurred during the weekend.
5. Make the majority of your trip days business days.
The
IRS says that you can deduct transportation expenses if business is the
primary purpose of the trip. A majority of days in the trip must be for
business activities, otherwise, you cannot make any transportation
deductions.
Example: Tim spends six days in
San Diego. He leaves early on Thursday morning. He had a seminar on
Friday and meets with distributors on Monday and flies home on Tuesday,
taking the last flight of the day home after playing a complete round of
golf. How many days are considered business days?
All of them. Thursday is a business day, since it includes traveling -
even if the rest of the day is spent at the beach. Friday is a business
day because he had a seminar. Monday is a business day because he met
with prospects and distributors in pre-arranged appointments. Saturday
and Sunday are sandwiched between business days, so they count, and
Tuesday is a travel day.
Since Tim accrued six business days, he could spend another five days
having fun and still deduct all his transportation to San Diego. The
reason is that the majority of the days were business days (six out of
eleven). However, he can only deduct six days worth of lodging, dry
cleaning, shoe shines, and tips. The important point is that Tim would
be spending money on lodging, airfare, and food, but now most of his
expenses will become deductible.
Consult us before you plan your next trip. We'll show you the right
way to legally deduct your vacation when you combine it with business.
Bon Voyage!
Please feel free to call us any time to learn more...
Dan Milos, CPA
