I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
Just got bank from vacation - How I'm going to deduct it all ποΈ
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Psych - that's crazy talk. I'm a CPA and went to a lake house with my family. No way I'm going to deduct any of that. But what are the rules here? How do people actually do this? Let's jam π It comes down to a day countThe IRS settles this with one question. Was the trip primarily business or primarily personal? Domestic travel is all or nothing on the flight. Primarily business, and the entire airfare is deductible even though you spent Saturday on a boat. Primarily personal, and the airfare is zero, no proration, no partial credit. You get only the direct business costs you incurred once you were there. "Primarily" does the heavy lifting and is decided by counting days. Here are the rules:
Fly Monday, work a conference Tuesday through Thursday, stay Friday and Saturday for fun. That's four business days against two personal, and the airfare is fully deductible. Flip it to one meeting Monday and five days at the lake, and that same airfare is a personal expense in full. My trip had zero business days on it. That's why my answer is zero. Leaving the country flips the math in your favor πForeign travel gets better treatment than domestic, which surprises almost everyone. If you are outside the United States for a week or less, the trip counts as entirely for business even when you mixed personal time into it. One week means 7 consecutive days. Don't count the day you leave. Do count the day you return. Gone longer than a week, there's a second door. Spend less than 25% of your total time on nonbusiness activity and the trip is still entirely business. For this test you count both the first day and the last. Run the numbers on a 12-day trip to Lisbon. Two personal days puts you at 16.7% and the whole flight is deductible. Add a third and you're at exactly 25%, which fails the "less than" test, and you're back to allocating. Bringing the family costs you less than you thinkYour spouse and kids are not deductible. The statute is blunt about it. The only exception is a person who is a bona fide employee, with a real business purpose for being on the trip, whose costs would be deductible on their own return. That's the bad news, and it's not as bad as it sounds, because you still deduct your own cost at the single rate. The IRS uses this exact example: hotel room runs $199 as a double and $149 as a single, so you deduct $149 a night. Same logic on the car. If you were making the drive anyway, the extra passengers cost you nothing. Sidebar - I'm excited to share a new page on our firm website. Tax pros walk around with a library of strategies in our head, but which ones fit where is the real magic formula. I've shared this before, but I've now nested it in our firm website and added a "build your own tax gameplan" function - all free. Take a look and let me know what you think! βhttps://www.baldridgeledbetter.com/strategiesβ Now back to our regularly scheduled program. A real example from Tax CourtOn June 29, a licensed real estate agent walked into Tax Court having claimed $59,866 in travel and meals for 2021. He walked out with $711.60. His $16,325 of car and truck expense went to zero. He wasn't inventing the trips. He had credit card statements. He had a log with trip dates, costs, and descriptions: client meet and greets, lodging, car rentals, meals, parking. He built the log after the year was over, and built the mileage log during the exam itself. No odometer readings. The instructive part is what happened in the same case to his home office. He claimed $13,328 and got all of it, because the court is allowed to estimate a reasonable number when records are thin. Travel, meals, and vehicle expenses live under a separate rule where estimating is not permitted. You substantiate the amount, the time, the place, the business purpose, and your business relationship to the people involved, or the deduction is gone. Real expense, real business trip, no deduction. Contemporaneous means that week. A calendar entry, the receipt, one line about who you saw and why. Three traps that hit real estate people specificallyShopping in a market you're not in yet. Flying out to check on rentals you already own, in a market where you already operate, is a current deduction. Flying out to go find your first property in a new market is not. That cost gets added to the basis of whatever you buy, or sits as a start-up cost. Same flight, opposite answer, decided by whether the business already exists. "Educational" travel. There is a flat statutory ban on deducting travel as a form of education. Going to Scottsdale to study the market is not a business purpose. A calendared meeting with a broker in Scottsdale is. Cruise ship conventions. Capped at $2,000 per person per year, and only when the ship is registered in the United States and every port of call is in the US or a US possession. Most cruises fail the ports test long before the cap matters. The TakeawayA vacation is not deductible. A business trip with a vacation attached to it usually is, and the difference is a day count you control before you book anything. Four things to do before the next one:
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I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
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