The Business Travel Deduction: Mixing Business and Pleasure
When it comes to deducting the costs of your business travel the thing to remember is: For the IRS, this isn’t the first time around the block. Just filing a schedule C increases your chance of being audited. How will the IRS react if they question your line 24 travel expense deduction and it turns out it was for the costs of a Caribbean cruise with your sweetheart?
The rules here are pretty straightforward but their application to a particular set of facts can be murky. The base question is to decide whether the costs were “ordinary and necessary” (see blog post #1). So if on that ocean liner there was a convention, with seminars and networking events which you attended, and maybe you even sold something to somebody, well, that’s a good start.
But there’s a second step: Was the purpose of your trip primarily business or pleasure? If business then your transportation (but not your sweetie’s) may be deductible, as are only that portion of the remaining expenses allocable to the business aspect. For example, if you spent half your time with business and half at the buffet then maybe 25% of the total trip cost is deductible (half of your half and none of Sweetie’s half). And actual cash tax savings would only be around a third of that twenty-five percent, around 8% of the total trip cost. And, by the way, only half of the allocable meals costs get counted toward the business expense total.
How do you tell what the primary purpose of your trip was? In the parlance of law we say “it’s a question of fact”. Normal folk would just sniff and see what it smelled like.
But, wait, there’s more. Because your convention was on a cruise ship to claim your deduction there are additional reporting requirements. You’ll have to prove the cruise ship itself has to be registered in the United States (slim chance, that, in this day and age); that all ports of call were inside the U.S. or its possessions; and attach a written statement signed by an officer of the organization sponsoring the convention. Worse still, the total deduction allowed is capped (with a few exceptions) at $2,000.
And suppose your ship cruised to a sunny locale outside the United States, like Jamaica or Antiqua. Then you have another set of rules (section 274(c) of the Internal Revenue Code and its accompanying regulations) that could further limit your travel expense deduction. Additional documentation will also be required.
One final note: You still might be able to include your sweetheart’s expenses in the total expenses deemed deductible but only if he or she was your employee and came with you for a “bona fide business purpose”. A good rule of thumb: if your companion could have deducted the trip if she’d been traveling alone then you can deduct it when she travels with you.
Anyone will tell you: mixing business with pleasure is always a gamble. Still, there is money to be saved by taking legitimate business travel deductions. Keep good records, know the rules and, when in doubt, find yourself a good tax attorney.
This article is for informational purposes only and does not constitute legal advice. You should consult a qualified attorney before taking any action.