Vacation Write-Offs: What You Audit Not Do

Combining business with pleasure may not be an ideal way to spend a summer vacation, but it could mean a holiday from federal taxes.

The Internal Revenue Service allows individuals to tack on vacation days to business trips, conventions or educational seminars--even take the family along--and still write off unreimbursed expenses such as air fare.

The key to taking these deductions, however, is good record keeping.

“It’s extremely important to keep a log of all [business] contacts and all receipts” in case of an audit, said Marc Britton, director of financial planning for KPMG Peat Marwick in New York. “I would use a separate credit card for business purposes.”

The IRS has strict guidelines for deducting on-the-job travel costs and doesn’t take kindly to someone who uses business as an excuse to write off a family vacation to Disneyland or the Caribbean.

Since most major companies reimburse their employees, those most likely to be affected by these rules include self-employed individuals, teachers or employees of charities and small businesses. Many of them routinely itemize their income tax returns with business-related deductions.

“If you have a significant amount of business travel in large proportion to other expenses, perhaps on a business of a self-employed person, that might raise a red flag,” Britton said. “Once audited, if they find you’ve been going to resort areas a lot, you’re going to need a great deal of documentation to prove pleasure wasn’t a priority.”

To determine the purpose of a trip, the IRS will examine how much time was spent vacationing relative to the amount of time devoted to business.

Merely adding some business to the vacation itinerary, like visiting a client or scheduling a job interview, won’t make for a deductible trip. If the primary purpose was pleasure, none of the living expenses or travel costs is deductible, although you can deduct expenses incurred while conducting any business, such as cab fare, phone calls or lunches.

Keep in mind: You can only deduct half the cost for business meals and entertainment expenses for customers or clients, regardless of the trip’s purpose.

Attaching vacation time to a business trip can yield more write-offs. While the cost of lodging or meals during the leisure portion of the trip isn’t deductible, the full cost of transportation to and from your destination is, along with other living expenses while on business. The IRS will have you prorate these expenditures.

Should the family come along, business travelers need not worry about having their own deductions reduced. The IRS permits you to deduct what it would have cost to stay at the hotel alone.

“That means figuring out the single-room rate,” Britton said.

If traveling by car, you can deduct the full cost of the round-trip transportation since it would have cost the same had you traveled alone. If you flew, only your airline ticket would be deductible, however.

The only exceptions are if an accompanying family member is on your payroll and has a bona fide business reason for taking the trip.

For trips abroad, you can deduct the cost of air fare and lodgings provided business was the primary reason for the trip. If the trip either lasts more than a week or you spend less than three-quarters of your time conducting business, you must prorate the costs.