My Financial Coach would like to present our most recent guest blog written by Ben Sutton, brought to you by our Subject Matter Expert, Mazuma. You can read more about them and our other Subject Matter Experts on our SME page.
One of the perks of being a small business owner is the tax deductions you can take advantage of, including writing off trips and vacations. You just need to know your motives before you go!
To begin, you need to understand your trip needs to have a business purpose for it to be eligible as a tax deduction. The key element to writing off your trip is that its primary purpose is business.
When it comes to business trips—and all business expenses—the IRS requires your trip to be both ordinary and necessary to be deductible.
In IRS lingo, ordinary means it’s an expense “that is common and accepted in your business,” while necessary means “an expense that is helpful and appropriate for your business.”
Keeping those ideas in mind, here are some key tips for writing off your vacation.
Common business activities that you should consider on your trip include:
Business expenses that are tax-deductible include:
It’s best if you pay for these expenses using your business bank account to avoid comingling your accounts. That way, all your trip expenses are in one place and easy to find. However, if you do pay for some things with a personal card, you can still get the tax deduction. Just make sure to keep good records and keep track of your receipts and notes in case of an audit.
The IRS has several requirements that each small business owner must abide by to write off a business trip, including:
So you’re probably wondering, “Where does the vacation come in?” Let’s look at an example:
If you wanted to visit a friend in Chicago and stay for a few days, take a look at your schedule. You could travel by plane on Thursday (business day), attend a seminar Friday (business day), and visit your friend on Saturday (business day) and Sunday (business day) since weekends are automatically considered business days. You could them take Monday, Tuesday, and Wednesday for vacation days before traveling home Thursday (business day). The majority of the days were considered business days and all your flights, meals, and accommodations are deductible.
4 Business Days + 3 Vacation Days = Business Trip
What happens if you take your family on a vacation but still attend business activities? Do you miss out on all the tax deductions?
If the trip still meets the criteria above, you can still take advantage of writing off your trip, but calculating the write-off might be a little trickier. For example, you can write off your plane ticket but not your family’s plane tickets.
Here are the expenses you can still write off:
Other expenses you can’t write off include:
Again, it’s best if you can pay for business expenses with a business card, so separate restaurant checks or buy plane tickets separately where possible.
What if a family member is an employee?
If a family member is an employee and goes on the trip with you, you can write off their travel expenses as long as they attend and contribute to planned business activities. For example, they could attend the convention or seminar, participate in business conversations with clients, engage in research, etc.
This goes back to the discussion about ordinary and necessary. Would it be commonly accepted for a business in your line of work to send multiple employees to an event like this? Is it helpful and appropriate for your business? If so, then you can write off both of your expenses.
Now that you know the expectations for a business trip and the expenses you can write off, let’s review a few common mistakes small businesses make when trying to take a tax deduction on a trip:
Instead of thinking, “how can I write off my vacation?” think “how can I add a vacation to my business trip?” As a small business owner, you want to save money, and what better way to save than planning a trip around your business!
If you have additional tax tips or questions, reach out to our team today or sign up for a 30-day free trial with Mazuma! We are here to save you time, money, and stress by handling your small business bookkeeping and taxes.