A Business Owner’s Guide in Deducting Business Travel Expenses

You’ve worked hard all year long that you can’t find time for some vacation. You’re worried that your business will suffer when you go away for several days. Or you may be concerned about the expenses that you will incur.

But did you know that as a business owner, you can attend a convention or seminar, squeeze in some days of pleasure, and then deduct certain expenses in your next tax return?

Sure, you won’t be able to deduct the travel expenses of your spouse or children, but with good planning, you’ll be able to get a free ride to and from your destination. You can also write off certain expenses like your lodging, meals, and even the cost of cleaning your clothes.

Think about the possibilities. You can spend a week in the Bahamas for a convention or conference and then deduct your expenses accordingly.

But before you start booking a trip to the Bahamas, it is imperative to get familiar with the rules first.

Writing Off Expenses during a Convention

The IRS is very clear about deducting travel expenses for a business convention— the participation or attendance of the taxpayer to the activity should benefit his or business.  This also applies

Let’s say you own a computer software shop. You attend a three-day IT conference in Puerto Rico, where you were able to meet some clients and bag new deals along the way.

Because the participation in the convention benefited your business, you can write off the expenses related to the said trip.

But if the convention is held for a purpose that isn’t related to your business such as political, investment, or social issues, then you won’t be allowed to deduct your travel expenses.

You can claim travel expenses related to your participation in a convention held within the United States, and other North American territories such as:

  1. Bahamas
  2. Aruba
  3. American Samoa
  4. Baker Island
  5. Bermuda
  6. Micronesia
  7. Canada
  8. Costa Rica
  9. Dominican Republic
  10. Guam
  11. Jamaica
  12. Puerto Rico
  13. S. Virgin Islands
  14. Mexico
  15. Kingman Reef
  16. Barbados
  17. Jarvis Island
  18. Netherlands Antilles
  19. Palau
  20. Saint Lucia
  21. Antigua and Barbuda
  22. Johnston Island
  23. Panama
  24. North Mariana Islands

 

However, there are two things that the IRS will look for in determining whether you can write off your expenses during a conference or convention held outside the US.

Aside from the meeting directly related to your business, the IRS will also determine the reasonableness of the convention or conference being held outside the US.

The following factors will be considered when determining the practicality of a conference or convention held within the North American region:

  1. Purpose of the meeting as well as the activities that took place
  2. Purpose of the sponsoring groups
  3. Homes of the active members of the sponsoring organization or group

Going back to our example, you can argue that the three-day conference held in Puerto Rico is reasonable because most of the active members of the group that sponsored the event are based in Puerto Rico, Mexico, Cuba, and nearby territories.

The IRS will likely call for an audit in case the sponsoring organization and all of the participants in the convention work or live in the United States. Obviously, the tax authorities will feel that the convention isn’t necessary because the participants and the sponsoring group are based in the US.

Here’s a tip–keep the official agenda or program of the convention or workshop which you are participating in. This can prove that your claim is warranted, especially if you can show that the official agenda of the convention is related to your business or trade.

Allowable Deductions

If you are able to satisfy the requirement of the IRS on business travel, particularly participation or attendance in conventions, you will be able to write off the following expenses:

  1. Transportation
  2. Lodging
  3. Baggage and Shipping
  4. Meals
  5. Cleaning
  6. Communication expenses
  7. Others

Most of these expenses are 100% deductible, except for meals.

Transportation covers your travel expenses from your home and business destination. It doesn’t matter if you used your car, took a bus, rode a train, or traveled by airplane. You are legally allowed to claim 100% of your transportation expenses for a legitimate business travel.

Obviously, you can’t claim a free ticket or a free ride as a reward for being a frequent traveler.

In case you had to take a cab or rent a car to shuttle back and forth from your hotel to the place where the convention was held, you can also claim those expenses as tax deductible. The same goes for the taxi or car rental costs for bringing you from the airport or station to your hotel.

If you brought your own car, you can deduct costs of gasoline, toll, and parking.

You can also claim 100% of your lodging expenses during the entire business trip.

You can also claim the costs of laundry and dry cleaning, in case you needed those services while at a convention. Business call expenses may also be written off.

In fact, you may even deduct tips that you pay for the above mentioned services.

Cruise Ship Conventions

You may wonder what deductions you can claim if you attended a convention onboard a cruise ship.

You may claim the same deductions, but you are limited to a ceiling of $2,000 every year if you attended a cruise ship convention.

Moreover, there are certain requirements that you will have to meet if you want to qualify for a tax deduction for a cruise ship convention or similar meeting.

First, the cruise ship where the convention or seminar was held should be registered in the US. This is a tough requirement to meet, as there are only a handful of ocean-worthy ships that are registered in the US.

Thus, you should check first the registry of the ship before signing up for a cruise ship convention. If not, then the expenses you will incur won’t be tax deductible.

Another requirement that you should meet if you are to write off your attendance in a cruise ship convention is that the ship must make all its ports of calls in the US.

Moreover, you are required to show a written statement that details the number of days you spent on the cruise ship, a breakdown of the number of hours spend each day to business activities, and a program of activities of the entire convention.

You will also have to attach a written statement signed by an officer of the group that sponsored the said activity. The statement should detail the daily schedule of business activities of the convention, as well as your hours of attendance at the said activities.

As you can see, it is quite a task for business owners to write off cruise ship conventions. The IRS obviously does not want taxpayers to deduct their vacations in their tax returns.

Foreign Travel

If business travel within the US is closely scrutinized by the IRS, you can expect the same for foreign travel.

Foreign travel spent solely for business is 100% deductible. This means that if you spend 100 percent of your waking time on foreign soil for business-related activities, then you can claim all your travel related expenses.

What if you didn’t spend all your time abroad for business? Can you still make a claim?

Yes, provided you meet any of these exceptions:

  1. You don’t have substantial control over the trip. Employees who were reimbursed for their travel expense allowance as well as those who aren’t related to the employer are allowed to claim their travel expenses under said circumstance.

But since you are the business owner, then it means you can control the timing of your trip. Hence, you won’t be able to write off your travel expenses abroad.

  1. Prove that vacation wasn’t the primary consideration in arranging the trip. Even if you are the business owner who has control over arranging the trip, you can write off your expenses if you can prove that vacation wasn’t the main consideration in the trip.
  1. You were abroad for less than a week. Your trip may be considered solely for business if you were outside the US for 7 days or less. The IRS says you should count the day you return to the US, and not the day that you left the country.
  1. You spent 75 percent of your time for business. You may be outside the country for more than a week, but you can still deduct expenses during your business travel if you can prove that you spent less than 25 percent of your time on personal activities.

For instance, you spent 20 days in Europe. After 15 days of non-stop meetings, you spent four days going around. The final day was then for your travel back to the US.

Since you spent 75 percent of your time in Europe for business activities, you can deduct your business-related expenses during the trip. This includes the cost of round-trip plane fare, and 50 percent of your meal expenses during the 15 days.

Travel Primarily for Personal Reasons

It should be clear by now that you can’t claim deductions for a vacation or personal trip. Yet there are times when you are on vacation and fortunately stumble upon a business opportunity. Can you make a claim on the expenses that you incurred on a business-related activity?

The answer is yes. You can if you can prove that the expenses are directly related to your trade, or even better, can boost your business.

Let’s go back to our example.

You were on a vacation with your family in Miami when you heard of a three day Internet security seminar.  Since you run a computer software business, you felt that attending the seminar can update you on the latest in Internet security. Or that you can get new clients by participating in the said activity.

You can deduct registration fees, transportation costs, and meal expenses that you incurred while you were at the seminar. You can even charge your hotel fees, in case you booked one during the course of the activity.  The same goes for your laundry and dry cleaning expenses.

But can you charge your airfare? No, since you had traveled to Miami primarily for personal reasons.

How to Avoid an Audit

Now that you have an idea on the deductible expenses that you can claim during a legit business travel, you may wonder—how can I avoid getting audited by the IRS?

Here are some tips that you should keep in mind:

  1. Record everything you did during your business travel. The last thing that you want to happen is for the IRS to conduct an audit after you had written off travel expenses you had incurred two years ago. By then, you would likely have forgotten the details of your meetings, or lost hotel bills and receipts.

For example, write down the names of the people you had lunch with at the back of a receipt issued by a restaurant. You should also keep all the hotel receipts you had.  And take photos of your meetings to prove that you indeed had business activities during your trip.

  1. Don’t deduct travel expenses of your spouse. If you brought your significant other with you, then you won’t be able to claim a deduction for her expenses unless she’s your employee or she played an essential role during the business travel. And no, that doesn’t mean taking down notes for you or socializing with your clients.

You must prove that your spouse’s presence during the travel was necessary, like serving as your translator.

  1. Be reasonable. The tax authorities would know if you claim extravagant expenses. So unless you’re treating a client who’s a billionaire, then you probably don’t want to expense a fancy dinner at the Ritz.

So, are you ready to mix business with pleasure on your next travel.