Summer is a time when many lawyers decide to take a well-deserved break from their busy schedules. But what if I told you that you could claim your summer trip as a business expense? It may sound too good to be true, but under certain circumstances, you can legitimately claim your summer trip as a business expense and get tax benefits. This blog post will discuss how you can do so without raising any red flags with the IRS.
I like to think of tax planning as a strategy to avoid fraudulent activity. Done in advance and it’s called planning. Done after the fact and it’s called fraud. If you plan your business trip in advance, considering the IRS rules and regulations, you can maximize your business deductions and take in some sightseeing while traveling for business!
Let’s get into it! Lots to discuss…There are some requirements for your travel.
1. Business Purpose
Your trip must serve a clear business purpose. This means that your trip should be closely related to your legal practice. For example, attending a legal seminar or conference in a resort town could be a valid reason for a trip. Alternatively, you could also take a trip to meet with clients, investigate a case, or scout potential locations for a new legal office. In short, if your trip has a clear business purpose, you can claim it as a business expense.
2. Reasonable Expenses
The expenses you incur during your trip must be reasonable and necessary. This means that you should not be extravagant or spend more than what is necessary for your business purposes. For example, if you stay in a luxurious five-star hotel while attending a legal conference, you may not be able to claim the entire cost of your stay as a business expense. However, if you choose a reasonable hotel or rental property, you can claim your accommodation, transportation, meals, and other expenses.
3. Document Everything
It is important to document everything related to your trip. You should keep receipts, invoices, and other documentation to substantiate your business expenses. You should also maintain a diary or logbook of your activities, including the purpose of your trip, the dates of your travel, the places you visited, the people you met, and the expenses you incurred. This will help you provide accurate information to the IRS in case of an audit.
4. Proportionate Allocation
If only part of your trip has a business purpose, you can only claim a proportionate amount of your expenses as a business expense. For example, if you spend two weeks in a beach resort and attend a three-day legal seminar, you can only claim a proportionate amount of your expenses for those three days. Similarly, if you rent a car for both business and personal use, you can only claim the portion of the rental fee that relates to your business use.
5. Consult an Expert
If you are unsure about whether your trip qualifies as a business expense or how to claim it, it is always a good idea to consult a tax expert. A qualified tax accountant can advise you on the tax laws, regulations, and best practices related to claiming your trip as a business expense.
Things to keep in mind when planning your travel in order to maximize your deductions…
Travel WITHIN the United States
1. You can deduct all your travel expenses if your trip was entirely business related.
2. If your trip is primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct your business-related travel expenses, meaning the entire cost of getting to and from your business destination and any business-related expenses.
3. If your trip is primarily for personal reasons, such as a vacation, the entire trip is nondeductible, however, you can deduct any expenses that are directly related to your business…but none of the travel costs to get there.
Travel OUTSIDE the United States
1. You can deduct all your travel expenses if your trip is entirely business related. There are four exceptions to having your trip considered entirely for business even if you don’t spend your entire time on business activities! In other words, you can deduct the total cost of the travel expenses for getting to and from your destination.
Exception No 1: No Substantial Control
Your trip is considered entirely for business if you don’t have substantial control if you:
1. Are an employee who was reimbursed or paid a travel expense allowance, and
2. Aren’t related to your employer. or
3. Aren’t a managing executive.
Exception No 2: Outside the United States no more than a week
Your trip is considered entirely for business if you are outside the United States for 7
days or less. In counting days, don’t count the day you leave the United States but do
count the day your return to the United States.
Example. You travel to Brussels primarily for business. You left Denver on Tuesday and
flew to New York. On Wednesday, you flew from New York to Brussels, arriving the next
morning. On Thursday and Friday, you had business discussions, and from Saturday
until Tuesday, you were sightseeing. You flew back to New York, arriving Wednesday
afternoon. On Thursday, you flew back to Denver. Although you were away from your
home in Denver for more than a week, you weren’t outside the United States for more
than a week. This is because the day you depart doesn’t count as a day outside the
United States. You can deduct your cost of the round-trip flight between Denver and
Brussels. You can also deduct the cost of your stay in Brussels for Thursday and
Friday while you conduct business. However, you can’t deduct the cost of your stay in
Brussels from Saturday through Tuesday because those days were spent on
nonbusiness activities.
Travel Day – Tuesday – Inside the United States – Denver to New York
Travel Day – Wednesday – New York to Brussels (Travel outside US doesn’t count as a
day)
Day 1 – Thursday – Brussels – Business Discussions
Day 2 - Friday – Brussels - Business Discussions
Day 3 - Saturday – Sightseeing
Day 4 - Sunday – Sightseeing
Day 5 – Monday – Sightseeing
Day 6 - Tuesday – Sightseeing
Day 7 - Wednesday – Brussels to New York (Travel back to the US counts as a day)
Travel Day – Thursday – Inside the United States – New York to Denver
You can deduct your cost of the round-trip flight between Denver and Brussels. You
can also deduct the cost of your stay in Brussels for Thursday and Friday while you
conduct business. However, you can’t deduct the cost of your stay in Brussels from
Saturday through Tuesday because those days were spent on nonbusiness activities.
Exception No 3: Less than 25% of the time on personal activities
Your trip is considered entirely for business if:
1. You were outside the United States for more than a week, and
2. You spent less than 25% of your total time, while outside the US, on nonbusiness
activities.
For this exception, count both the day your trip began and the day it ended.
Example. You travel from Seattle to Tokyo, where you spent 14 days on business and 5
days on personal matters. You then flew back to Seattle. You spent 1 day flying in each
direction. Because only 5/21 (less than 25%) of your total time abroad was for
nonbusiness activities, you can deduct as travel expenses what it would have cost you
to make the trip if you hadn’t engaged in any nonbusiness activity. The amount you can
deduct is the cost of the round-trip plane fare and 16 days of non-entertainment-
related meals (subject to the 50% Limit), lodging, and other related expenses.
Day 1 – Travel Day
Day 2 through 15 - Business Related
Day 16 through 20 – Personal or Sightseeing
Day 21 – Travel Day
5 Sightseeing Days / 21 Travel Days = 23.8% is less than 25%
Exception No 4: Vacation is not a major consideration.
Your trip is considered entirely for business if you can establish that a personal
vacation wasn’t a major consideration, even if you have substantial control over
arranging the trip.
2. You can deduct a pro-rata share of your travel expenses if your trip is primarily for business. You must allocate your travel expense between business and other activities to determine your deductible amount.
· The days you depart and return to the United States both count as days outside the US.
· Counting Days
Transportation Days
Count as a business day any day you spend traveling to or from the business
destination.
Business Days
· Any day that your presence was required – count as a business day any day your
presence is required at a particular place for a specific business purpose, even if most
of the day is spent on nonbusiness activities.
· Days spent in the pursuit of your trade or business.
· Days spent because of circumstances beyond your control.
· Certain weekends and holidays, as well as other days, that fall between business
days.
Personal Days
· Days that follow business days and before travel days.
Example 1. Your tax home is in New York City. You travel to Quebec, where you have a
business appointment on Friday. You have another appointment on the following
Monday. Because your presence was required on both Friday and Monday, they are
business days. Because the weekend is between business days, Saturday and
Sunday are counted as business days. This is true even though you use the weekend
for sightseeing, visiting friends, or other nonbusiness activities.
Example 2. If, in Example 1, you had no business in Quebec after Friday, but stayed
until Monday before starting home, Saturday and Sunday would be nonbusiness days.
Don't miss out on the tax benefits of claiming summer vacation as a business expense. Start planning your next business trip today and make sure to keep detailed records of all your expenses. If you need help with your taxes, don't hesitate to consult with a tax professional.