VACATION AS BUSINESS EXPENSE

Combining a tax deductible business trip with a short vacation, perhaps with a spouse and family, can be quite attractive. It is important to keep expense categories straight since different tests apply for deductibility.

However, it is generally much better for the expense to be paid directly by the company, rather than for the employee to receive a business reimbursement - and substantially better than for the employee/business owner to claim an itemized deduction under the current IRS regulations.

TRAVEL EXPENSES

You may deduct the cost of traveling in the U.S. for business, professional or investment purposes. However, you must be able to show that the primary purpose of the trip was business.

This does not mean that you cannot combine business with pleasure, only that the primary purpose must be business. The best way to satisfy the IRS is to prove that more than half of the time at the destination was spent on business.

The all-or-nothing test for travel: Transportation expenses are either fully deductible because they meet the test or they cannot be deducted at all. On the other hand, hotel, meal and entertainment expenses at your destination should be separated into business and non-business categories.

Do not count on deducting the full cost of a trip with your spouse. It is not enough for the IRS that a spouse’s presence is of assistance to you. Only your expenses at the meeting site are deductible, but you are not limited to half of the total costs there.

If driving to the meeting site, you may deduct almost the full transportation cost. If flying or taking the train, only your ticket is deductible.

For business-vacation combinations of seven days or less to spots outside the U.S., the regular rules on business travel, explained above, apply. But if you are away more than seven days and spend more than 25% of the total time vacationing, you lose a deduction for the portion of your transportation costs equal to the number of non-business days divided by the total number of days outside the U.S.

The rules are tighter for conventions outside North America. No costs may be deducted for such a business meeting unless the IRS can be convinced that the selection of the meeting site is reasonable. (In practice, it probably is better to be able to prove that it is more reasonable to hold the convention at the foreign site than in the U.S.)

Ship travel can be an asset on a combined business-vacation trip. Reason: Days spent in transit count as business days in the allocation formula. Example: A two-day business meeting in Paris is followed by a two week European vacation.

One example of how a travel expense is allocated in part-business, part-personal travel. If you fly (one day each way), only 22% is deductible (two business days plus two days of travel from a total of 18 days away). However, if you sail (five days each way), 46% is deductible (two business days plus 10 days of travel from a total of 26 days away).

ROOM CHARGES

You may still deduct the full amount of what it would cost to attend alone at the single room hotel rate, for instance. You may deduct the full cost of services when your spouse’s presence does not boost the charge, say, for the taxi from the airport.

BUSINESS ENTERTAINMENT

Both directly-related and associated entertainment expenses are deductible on a working vacation, if you follow the rules.

Directly-related entertainment includes quiet business meals where you need not even discuss business, provided you are with a client, customer or business associate, and have a general business purpose.

Associated entertainment expenses cover nights on the town, box seats at a game, etc. A specific business discussion must occur before or after the entertainment.

BUSINESS GIFTS

Business gifts are deductible, subject to a $25 limit. If you give theater tickets worth more than $25 to a client, you cannot deduct the excess. Go to the show with the client and you may write off the whole evening as business entertainment!

Good records are needed to justify deductions. Required: A diary in which you record expenses and their business purpose. Also, keep receipts for expenses of $25 or more. The diary alone is sufficient proof for smaller amounts. [IRC 274(b)]

DEDUCTIBLE HOME ENTERTAINING

Monthly at-home dinner parties that a publishing executive hosted for prominent guests were a deductible business expense, although the executive was not able to prove that business was actually discussed at the dinners.

It was enough, the Tax Court ruled, to show that the dinners were generally conducive to a business discussion. A key fact was that the taxpayer also did a lot of purely social home entertaining for which he did not claim a deduction.

Source: www.irs.gov