There are many tax benefits for business owners and one of the best is the ability to legally deduct travel expenses. A “business owner” includes a wide range of definitions, from CEO of a Fortune 5000 company to a small-business owner to an individual employee who runs a side business that is legally registered. Here’s how you can legally deduct an entire family vacation by following these rules:
Expenses Must Pass Three Tests
The general rule is that a travel expense is a deductible business expense if it meets three tests. Your travel must have a business purpose, expenses must be ordinary and expenses must be necessary.
Work Hours Are Required for More Than 50% of Weekdays
In addition to these three tests, the primary purpose of the trip must be business. While many people have enjoyed remote work over the last year, bringing your computer on a family vacation doesn’t meet the standards for the IRS. You must have a business reason for taking the trip and you must be traveling to a location outside of where you do your day-to-day business.
In addition, you must spend more than 50% of each workday (4+ hours each weekday) on business matters. This business time can include meeting with clients or prospective clients, having a shareholder meeting or looking for properties to acquire. If you meet the work hours test, the entire trip is deductible for you, assuming the trip is inside the U.S. For international travel, the deduction is proportionate to the amount of time you spend on business. If you spend 60% of each day on business, then 60% of your travel will be deductible. Plan your business and other activities so you meet this requirement.
Weekends Can Be Free and Deductible
Another travel tax deduction rule that many don’t realize is how to make a weekend trip entirely deductible. If you arrive on Friday, it is best to have a business meeting that day, and then schedule another business meeting on Monday before leaving. As long as the primary purpose is business during the weekdays, the entire trip is deductible, and you can take the weekend off.
Hotels Can Be Deducted as an Ordinary Expense
The “ordinary expense” rule means that the expenses are typical in amount and frequency for the industry. For example, the hotel room size is only relevant with respect to the “ordinary” expense test. If it is typical for the business owner to have a large room, it’s okay for the entire family to share the same size room. Having two queen size beds in a room instead of a single king (probably no more expensive) isn’t going to change the hotel deductibility.
Family Members Can Be Deductible as Employees
For travel to be deductible for spouses and children, they must also be actively involved in the business and there must be a business purpose for them coming along. If you hire members of your family to do things for the business, there are many tax benefits. For example, if a spouse or children are in sales versus bookkeeping, then there is a business reason to deduct their expenses if prospective client meetings are scheduled on the trip.
Travel is one of my favorite deductions because it is one of those expenses that most of us already have and, when planned properly and documented thoroughly, it gives us the opportunity to increase our business’s bottom line while decreasing our tax liability.
Tom Wheelwright is a CPA, CEO of WealthAbility®, best-selling author of Tax-Free Wealth (Rich Dad Advisors Series), speaker, entrepreneur and host of two popular podcasts: “The WealthAbility® Show with Tom Wheelwright CPA” and “The WealthAbility® for CPAs Show.”