One of the best things you can do for yourself is to take a vacation. This will give you the opportunity to take a break from your routine and relax, allowing you to recharge. This can be a challenge for small business owners because you are responsible for everything to do with your business. There are so many demands on your time. However, it is possible to use your vacation expenses as a tax deduction.
If you’re a small business owner in need of accounting services, consider Nolan Accounting. We work with businesses in southeast Wisconsin with their accounting and bookkeeping needs, as well as manage payroll and assist with tax prep. We understand that these tasks can be overwhelming and by passing these tasks off to us, you can focus on growing your business.
In this article, we’ll explain how you can use your vacation as a tax deduction.
Two Things to Know Before Using Your Vacation as a Tax Deduction
There are two things that you must keep in mind if you are considering using your vacation as a business expense.
Primary Purpose of the Trip Must be Business
First of all, it’s important to note that a vacation can be used as a deduction if the primary purpose of the trip is business. You can’t justify expensing a 7-day trip when you only have meetings for 1 of those days.
Count the number of days that you plan for business activities versus the number of days you plan to devote to personal activities. Your travel days count as business activities, as well as weekends that fall between Friday and Monday workdays.
For example, let’s say you fly out on a Thursday, have a meeting on Friday, then again on Monday and Tuesday, and fly back home on Wednesday. You have 7 days of business activities. You can spend another 6 days on personal activities and still use your trip as a tax deduction.
Business Appointments Must be Set Before Leaving
According to the IRS regulations, you must establish the trip as a business trip before leaving. You can’t simply take off with some business cards and hope to drum up some business. You need at least one appointment scheduled before you leave, or you can’t use the trip as a deduction.
What Vacation Expenses can be Deducted?
Travel expenses, including airfare, airport parking, taxis, etc, are a major portion of your expenses on any trip. These can be fully deducted as long as the trip meets the above criteria. However, it is important to note that there are some other expenses you can deduct. You can find the details in IRS Pub 463, but here’s what you need to know:
- For days devoted to business, you can deduct car rentals, lodging, and tips. So, if your trip lasts 13 days and 7 of those are for business, you can deduct those expenses. However, you will not be able to deduct the additional 6 days
- For days devoted to business, you can deduct 50% of food costs
- You can also deduct necessary expenses, including dry cleaning or baggage fees
- You will not be able to deduct travel expenses for your family or travel companions unless they are involved in the business as well.
If you can prove that a conference/convention is directly related to your trade, you will be able to deduct your travel expenses. The IRS will also take into consideration the location of the conference/convention. For example, if there was a similar one held nearby and you went to Hawaii instead, you may not be able to deduct these expenses. Consult with a tax advisor or examine the rules in IRS Pub 463.
For travel expenses under $75, the IRS does not require documentation. However, this doesn’t mean that you don’t have to keep records. You’ll still need to make sure that you document all vacation expenses, including what was purchased, when it was purchased, and how much you paid.
It is important to note that all lodging expenses need to be accounted for even if it was under $75 for the night. Therefore, in order to use it on your taxes, keep your receipt.
The best way to avoid problems with your taxes is to be 100% honest. Make sure that you only deduct expenses that you are able to and keep all supporting documentation to prove those expenses.
If you are unable to prove your amounts, you may lose that deduction as well as pay the tax, interest, and penalties. More importantly, it could flag you and cause the IRS to take a closer look at the rest of your return.
Everyone needs to get away from time to time to rest and recharge. This is challenging for small business owners because of the demands on their time. However, it is possible to use your vacation expenses as business expenses on your taxes, as long as you can prove the primary purpose of the trip was for business.
If you have a small business in southeast Wisconsin and have questions about using your trip as a tax deduction, let Nolan Accounting help. In addition to helping with taxes, we can handle your payroll and your ordinary accounting and bookkeeping needs.