You're planning a vacation, and thinking about taking some time during your trip to see a client. Maybe you can get a big tax deduction?
Well, maybe not.
Many small business owners find the deduction for travel expenses to be one of the most tempting, but also trying, parts of the federal tax law. Even aside from the issue of business versus personal travel, many owners are surprised to find the IRS has some strict limits on how big a deduction they can take.
IRS Publication 463, Travel, Entertainment, Gift and Car Expenses, lays out many of the rules that govern tax deductions for business travel expenses. The rules can be very complicated, and the government often differentiates between travel in and outside of the U.S. There are also rules for cruises taken for business purposes.
Business owners should get some advice from a tax professional to help them navigate the tax code. But here are some basics about the business travel deduction:
Business trip or vacation?
A classic example: You're going to a trade expo in Orlando, Fla., and decide to bring your family. You can deduct only the amount that you spend on business-related activities. So you can deduct the amount of what a hotel room would cost for yourself, but no more. If you rent a suite to accommodate your whole family, you can deduct only the price of a single room.
When you take your family out for a meal, it's not deductible. But if your spouse accompanies you to a business meal where spouses are expected to attend, his or her portion of the bill may be deductible. But check with a tax professional before you complete your return.
Another classic example is to extend the amount of time spent in a business destination for a personal trip. After the trade expo ends, you and your family spend a few days going to the Orlando attractions. From that point on, the only part of the family's expenses that is deductible is the cost of your trip back home.
Some owners try to deduct the cost of a vacation by including some minor business activities. That won't go over with the IRS, which is very clear in Publication 463: "The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip."
"The predominant purpose of the trip has to be for business," said Leon Dutkiewicz, a certified public accountant with Margolis & Co. in Bala Cynwyd, Pa. "The primary purpose cannot be personal."
But if you do have engage in some business activities on what is primarily a vacation, any expenses related to those activities can be deducted.
The same rules apply if you send employees on a business trip.
Generally, the IRS permits businesses to deduct the full amount of their travel expenses, including transportation, car rental, lodging, even dry cleaning and tips.
But only 50 percent of the price of your business meals can be deducted.
A business meal is considered entertainment even when it takes place during your trip. And the IRS allows companies to deduct just 50 percent of what they spend on meals.
If you like to live the high life when you're traveling, be aware that the IRS does not permit deductions for expenses that it calls lavish or extravagant.
The agency acknowledges, however, that an expense may not be considered lavish if it is "reasonable based on the facts and circumstances."
So the IRS might agree to your renting a luxury car to take clients to a black-tie dinner at a conference, but not for you to visit a manufacturing plant in an industrial park.
Dutkiewicz noted that the IRS has standard per diem rates for lodging and meals in different locations across the country.
You should not claim a higher amount than what the government allows. However, if under the circumstances it's reasonable for you to be paying more, you may be able to take a larger deduction. You can find those rates in Publication 1542, Per Diem Rates.
Dutkiewicz said there's no specific dollar amount that would raise questions at the IRS. As with other business expenses, the agency will consider the totality of a company's circumstances in deciding whether to allow a travel deduction.
So, he said, a business owner who sells software and is often on the road to visit customers is likely to have a large travel deduction that the IRS will accept. But a dentist who the IRS believes should have minimal business travel but claims a large amount might find his or her return questioned.