Deducting Travel Costs Can Still Be Beneficial

Summer vacation time is almost here. Wouldn’t it be nice if you could write off at least part of your expenses?

Tax reform made it harder--but not impossible--to deduct travel expenses. Purely personal vacations, such as sightseeing or visiting relatives, are not deductible. Neither are trips to attend investment seminars and other investment-oriented excursions.

What is deductible are trip expenses incurred for business purposes, such as sales calls or client visits. But even those expenses face limits on deductibility. You can write them off only to the extent that they exceed 2% of your adjusted gross income. And only 80% of food and entertainment expenses are deductible.

Here are some tips on how to get the most tax bang for your vacation buck:

* Mix business with pleasure. If your trip is primarily for pleasure, you can’t deduct the air fare or other transportation costs to and from the vacation site. However, if you perform some legitimate business activities at the vacation site, you can deduct the hotel, local transportation fees, meal costs or other expenses directly related to that work. You also can deduct expenses such as dry cleaning if, for example, you had to clean a suit before visiting a client.

One way to take advantage of this rule: When planning your vacation, look for business-related meetings or conventions that you can plan your trip around. “If you’re an accountant and you want to go to Hawaii, find out when there are tax meetings there,” says Sidney Kess, an accountant and tax lawyer in New York. “Or if you’re a doctor, find out when the medical convention is there. Make your plans accordingly.”

* Mix pleasure with business. If your business trip falls on Thursday and Friday, tack on a little R&R; for the weekend. As long as your trip is within the United States and is primarily for business, you can generally deduct the transportation costs to the site. And staying the weekend gives you a double benefit: If you fly, fares are lower for staying over Saturday nights.

How do you prove that your trip is primarily for business? The Internal Revenue Service has no set rule, but generally the trip will qualify if you can show that you spent most of the time on business or that you would not have gone were it not for the business purpose, Kess says.

So if you go to Hawaii for a four-day business meeting and extend your stay for another three days to swim and sightsee, the cost of the flight should be fully deductible, Kess says. And the food and lodging expenses should be deductible for the four days that you spent on business.

But taking along the spouse and kids could present problems. You can’t deduct their costs unless their presence was essential to the business purpose. Taking notes or running errands for you isn’t good enough.

* Beware of foreign trips. Here, tougher rules apply. If business was the primary reason for the trip and it lasts less than a week, you can deduct all transportation costs.

But if the trip lasts longer than a week, you cannot spend more than 25% of the time on pleasure to deduct all transportation costs. Otherwise, you can deduct transportation costs only according to the percentage of the trip spent on business.

The tests are even tougher for conventions, seminars or related activities outside North America. The activity must be directly related to business, and there must be a good reason the activity had to be held outside North America.

* Donate your vacation time. Travel expenses related to essential charitable activities can be deducted as a charitable contribution, which is not subject to the 2% floor as long as you itemize. Mileage driven for charitable activities, for example, can be written off at the rate of 12 cents a mile.

But there’s a big catch: The trip must be primarily for the charitable purpose and have no “significant” element of personal pleasure--generally meaning that you must put in a full day of charitable work each day, Kess says. And your duties to the charitable organization must be significant and essential, such as if you are leading your group’s fund-raising drive or performing actual work on an archeological dig. Merely attending a meeting is not enough.

* Make your educational trips necessary for work. Under tax reform, “travel as a form of education” is no longer deductible. So if you teach French, visiting Paris to get a taste of the culture and practice your language won’t cut it. But you can deduct the cost if you go to France to take language classes that are essential to your professional development.

The cost of taking classes to learn a new occupation, however, are not deductible.

* Get your employer to pick up the tab. The best way to save money on your trip is not to spend your own. Also, you won’t have to worry about the IRS questioning the intent of your trip if your company is willing to pay for it.

If you are self-employed, charge the expenses to your business as an expense on Schedule C. That’s also not subject to the 2% floor.

* Keep your cruises within the United States. You can deduct up to $2,000 a year (not per trip) for cruise ship conventions or meetings, only if you establish that the activities are directly related to business. Also, the cruise ship must be registered in the United States, and all of its ports of call must be in this country or its possessions.

* Keep good records. This is a must if you are audited. The IRS considers travel expenses a primary area of taxpayer abuse. The better you can document the business purposes of your travel--by saving convention programs, meeting notes, business cards and the like--the safer you’ll be.

More questions? Call the IRS at (800) 424-FORM and request Publication 463, “Travel, Entertainment and Gift Expenses.”

Bon voyage!