Tax Tips on Combining Business and Pleasure

You can deduct the costs of good times if the trip is mainly for business, lawyers say.
David KatzAugust 15, 2011

With productivity the top priority at many finance departments — and with smart phones getting ever smarter at tracking down sunbathing executives — it’s getting harder for CFOs to spend some days exclusively at the beach.

Now that the dog days of August are nearly upon us, however, it might be a good idea to get pencil and paper in hand for some strategizing that can combine a few tax-friendly vacation days with that business trip you’ve been planning.

As it happens, U.S. tax laws can provide executives as well as employees with a range of opportunities to do just that. “Although business is business and pleasure is pleasure, the tax code does not always adhere to absolutes,” according to a business alert issued earlier this month by Duane Morris LLP, a law firm.

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The key is to properly combine and document business and personal travel. For instance, when a few vacation days are added onto what’s essentially a business trip within the United States, business-related travel costs are usually deductible, according to the firm. Actual transportation expenses such as cab, rail, and plane fares and baggage fees and tips are deductible for out-of-town business.

The bottom line, says Duane Morris, is that transportation costs are 100% deductible — as long as the main reason for your trip is business rather than pleasure. If vacation is the main reason, however, you won’t be able to deduct any transportation expenses.

How do you determine that the primary reason is business? The Internal Revenue Service is silent on the question. But the number of days spent on business as compared with pleasure can be a key factor in its rulings, according to the firm. Travel days, weekends, and holidays may count if they fall between days devoted to business and if returning home won’t be practical.

“Standby days” — when your physical presence is required, but you’re not necessarily — also count as business days. Further, any other day in which you’re mainly working during normal business hours is also counted. Also included: days during which such things as power failures or local transportation problems occur when work is expected but isn’t possible.

“For domestic trips, business will likely be considered as the primary reason for a sojourn whenever the business days exceed the personal days. You may want to accumulate and maintain proof by logging everything in a daily planner,” advises the firm’s alert.

What isn’t allowed? Deductions for spouses, dependents, or other individuals who join the taxpayer or employee on a business trip. There is, however, an exception: the person accompanying the taxpayer is an employee of the company paying or reimbursing the expenses; the employee serves an actual business purpose; and the expenses of the employee are otherwise deductible.

What happens when you get to that sunny clime? You can fully deduct such out-of-pocket business costs as lodging, hotel tips, seminar and convention fees, and cab fare. Concerning business meals, you’ll find that 50% of otherwise allowable deductions for them will be disallowed.

Expenses for a personal day are nondeductible — except if the day is a “Saturday night stay-over.” In such cases, Saturday night stay-overs can be deductible if they cut the overall cost of the trip.

If you can show that staying an extra day or two costs the same as or less than returning home immediately after the business meeting is over, the IRS permits you to deduct the extra lodging and meals costs, with the latter subject to the 50% disallowance rule. Duane Morris advises you to be able to document that the airfare savings equals or exceeds the out-of-pocket costs of staying the extra day.

What about travel outside the United States? If it occurs mainly for business reasons, you must allocate travel expenses, including transportation, between business and personal expenses. But you can deduct transportation and other out-of-pocket business expenses in full if your jaunt is primarily business related and you satisfy either of two rules, according to the alert.

One of the strictures is that the business trip must be a week or less, counting the day of return but not counting the day of departure. Under the second rule, you can fully deduct transportation and other out-of-pocket business expenses for trips lasting more than a week if less than 25% of the trip is spent on vacation. In the latter case, you may count the day of departure and day of return as business days, as long as the travel is to or from the business destination. Expenses allocable to personal days are not deductible.

Even if the two rules aren’t met, travel on behalf of an employer qualifies for a full deduction if the travel is subject to a reimbursement or travel-allowance arrangement and the traveler isn’t a managing executive of the company or related to the employer.

Finally, there’s a catchall provision: you can deduct 100% of the costs of traveling to a foreign destination if you can prove that a personal vacation was not among your considerations in choosing to make the trip. Bon voyage!