Plan Ahead To Maximize
Deductions |
Self-employed business travelers
have a golden opportunity to combine business and pleasure
with tax-saving results. As you know, you can write off
ordinary and necessary expenses when traveling away from home
on business. But how much can you deduct if you go on a
business trip and add a few extra days of
vacation? The
answer depends on several factors but you might be able to
maximize your deductions by planning ahead.
Here are
some tax-smart strategies when your travel destination is
within the United States:
Deduct All Transportation Costs Even While
Vacationing Part of the Time – IRS guidelines allow
self-employed individuals to deduct 100 percent of their
transportation costs for travel within the United States.
The catch: The primary reason for your trip must be
business, rather than personal pleasure. On the other
hand, if vacation is the primary motivation for your
travel, you can’t deduct any of your transportation
expenses, even though you may conduct substantial business
during the trip.
Tax-smart strategy: Go ahead and mix in some
vacation days during trips taken mainly for business
purposes. That way, you can deduct 100 percent of your
transportation expenses and stay within IRS guidelines.
Transportation expenses include plane tickets, the cost of
getting to and from the airport at both ends of the
trip, and luggage handling tips. The same rules apply if you
travel by car or rail, rather than by air.
How do you determine if the purpose of a trip is
primarily for business or pleasure? There are no concrete
rules but you can claim a trip is mainly for business when
your business travel days exceed your personal travel days.
Count All Eligible Business Days –
So what is considered a business day? According to
the IRS, you can count travel days as business days. Of
course, you also count days when you spend the bulk of your
time during normal business hours working. And you can
include weekends and holidays that fall between business
days, as long as it is impractical for you to return home on
those days.
What about standby days when the
customer or client requests that you stick around just in
case you are needed? Those count as business days too,
whether or not you are actually called in to work. Finally,
days that you intended to work but could not for reasons
beyond your control also count as business days. For
example, your meeting might be canceled because the power
goes out or your customer falls ill.
The payoff for all this counting of days comes when you
can plan your trips to include more business days than
personal days. As long as that basic guideline is met, you
can deduct all your transportation costs even though
you may spend a good amount of time playing golf and hanging
around the pool. Tax-smart strategy: Keep a log and carefully
chronicle all your business activities, including the date
and amount of time spent on each one. If you get audited,
the IRS will want to see proof of what you were doing during
any travel you claim was for business. Good records are your
best defense.
You can also deduct all your out-of-pocket expenses for
business days during your trips. So hotel bills, cab fares,
seminar fees, and the like are fully deductible. You can
deduct 50 percent of your meal costs for business days. As
you might expect, out-of-pocket expenses for personal days
are generally nondeductible. However, there’s a big loophole
for Saturday night stay-overs, as you are about to see.
Use the Saturday Night Stay-Over Loophole for
Bigger Deductions – Although it seems almost too
good to be true, you can use the Saturday night stay-over
rule to gain even more deductions when you mix pleasure
with business travel. Here’s how. If staying over on
Saturday night reduces the airfare for your business trip,
you can deduct the out-of-pocket cost of staying the extra
time even though you spend it vacationing. Just make sure
the extra cost of the stay-over is less than or equal to
your airfare savings. (IRS Private Letter Ruling
9237014.)
For example, let's say you leave Thursday morning on a
trip to attend business meetings that take up most of that
day and Friday morning. You then stay over the rest of
Friday and all day Saturday before returning home late
Sunday afternoon. By staying over Saturday night, you reduce
the airfare cost from $1,700 to $600. Your additional
out-of-pocket costs for meals and lodging on Friday night,
Saturday, and Sunday total only $550 ($350 for the hotel and
$200 for meals).
Thanks to the Saturday night
stay-over loophole, you can deduct your meals and lodging
for all out-of-town days (subject to the 50 percent rule for
meals). And you can deduct all your transportation costs,
because the trip was primarily for business purposes.
Bring Your Spouse Along – Unless
your spouse is an employee of your business, you can't
deduct his or her airfare. But you don't have to settle for
deducting half the hotel bill. You can write off the cost of
what you would have paid traveling alone. In other words,
the single room rate rather than the double. Let's say the
hotel charges $150 for a double room and $120 for a single.
You can deduct the $120, rather than half of the double rate
($75). To prove your deduction, ask the hotel for a room
rate schedule showing single rates for the days you're
staying.
What if you pack the kids into the car for a
combined business-vacation trip? You can deduct the total
cost of driving back and forth since you would have incurred
the same expenses if you were traveling alone.
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A “working
condition fringe benefit” is tax-free to your employees and
deductible by your company. To qualify for this tax-favored
treatment, however, the expense must be “ordinary and
reasonable” under the circumstances. In addition, if the
benefit involves recreation, amusement or entertainment, the
expense
"Ordinary and
Necessary" Not all
companies are successful in carrying out tax-favored
recreational activities. In another case, a firm
sponsored a Super Bowl weekend for employees and
customers in New Orleans. Spouses and
children were
invited. The Federal Circuit Court ruled that the
$103,000 spent on the trip was not a ordinary and
necessary business expense that was directly related to,
or associated with, the active pursuit of its business.
The court emphasized that the weekend "appears to have
been little more than a group social excursion with
business playing a subsidiary role." (Danville
Plywood Corp,, 899 F.2d 3, Fed. Cir.
1990) | must be directly related
to — or associated with — your business.
The IRS frequently questions corporate entertainment
deductions but as one case illustrates, taxpayers taking
significant write-offs can prevail. Facts of the
case: For 40 years, Townsend
Industries conducted an annual two-day sales meeting at its
headquarters. Following the meeting, the Iowa printing press
manufacturer sponsored a fishing trip for all of its staff
members at a resort lodge in Canada. Generally, about half of
the employees attend. The activities at the lodge included
fishing and golfing in groups. By mixing up staff from
different departments in this relaxed environment, Townsend
stimulated business discussions.
The IRS challenged the
company’s deductions and claimed the benefits to the employees
represented taxable wages. In other words, a portion of these
wages should have been withheld for income tax, Social
Security and Medicare taxes.
After a series of twists and turns, the case wound up
before the Eighth Circuit Court, which ruled that the cost did
qualify as a working condition fringe
benefit
Here are the reasons cited by the
court:
The employees viewed the excursions
as a regular part of their business routine.
"Although the trips were voluntary," the court noted,
"nearly all of the Townsend employees who testified felt an
obligation to attend and some felt that it was part of their
job."
The outings were limited to
employees only. No spouses or children were
allowed. This was additional evidence that the trips were
not "some sort of paid vacation," the court
stated.
Specific business activities were
included as part of the trips. The court noted that
employees and salespeople were exposed to Townsend products,
a new product was initiated and subsequently introduced, and
current business practices were discussed at length.
(Townsend Industries Inc., CA-8, No. 02-3756
9/15/03)
Caveat
This decision should not be viewed as carte blanche to
sponsor tax-advantaged recreational-type activities for
employees. In fact, the court insisted the ruling does not
mean that "in all cases in which a corporation sponsors
hunting, fishing, or other trips to 'luxury' vacation spots,
the sponsoring corporation can avoid including the
per-employee cost of the trip in its employees' wages merely
by presenting testimony relating to business allegedly
conducted during the sojourn."
It’s recommended that you adopt a formal agenda for
business discussions and record any significant developments
or resolutions. Consult with your tax adviser for more
information |
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