How to turn your fun trips into tax cuts
How would you like to deduct every dime you spend on vacation this year? Tim did. Legally. Want to know how?
Tim wanted to take a two-week trip around the US. He learned that every thing is much cheaper when you can legitimately deduct it.
1. Make all your business appointments before you leave for your trip.
Most people believe that they can go on vacation and simply hand out their business cards in order to make the trip deductible. Wrong.
You must have at least one business appointment before you leave in order to establish the "prior set business purpose" required by the IRS.
The first thing that Tim needs to do is set up appointments in various cities such as Chicago, Sacramento, and Phoenix before he leaves. The best way to establish this is to put advertisements in the newspaper, looking for distributors. He could then interview those who respond when he gets to the business destination.
Example: Tim wants to vacation in Hawaii. If he places some advertisements for distributors, or contacts some of his downline to perform a presentation, the IRS would accept his trip for business.
Tip: It would be vital for Tim to document this business purpose by keeping a copy of the advertisement and all correspondence along with noting what appointments he will have in his diary.
2. Make It All "Business Travel."
In order to deduct all on-the-road business expenses, you must be traveling on business. By definition, you are on business travel whenever you are sleeping overnight in a strange bed - conducting business, that is!
Example: Tim wanted to go to a regional meeting in Boston, which is only a one-hour drive from his home. If he were to sleep in the hotel where the meeting will be held (in order to avoid possible automobile and traffic problems), he will be deemed to be on business travel.
Tip: Remember: You don't need to live far away to be on business travel. If you have a good reason for sleeping at your destination, you could live a couple of miles away and still be on travel status.
3. Make sure that you deduct all of your on-the-road -expenses for each day you're away.
For every day you are on business travel, you can deduct 100% of lodging, tips, shoe-shines, laundry and dry cleaning, car rentals, and 50% of your food. Tim spends three days meeting with potential distributors. If he spends $50 a day for food, he can deduct 50% of this amount, or $25.
According to the IRS, no receipts are required for any travel expense under $75 per expense. The only exception would be for lodging.
Example: If Tim pays $6 for drinks an the plane, $6.95 for breakfast, $12.00 for lunch, $50 for dinner, he does not need receipts for anything since each item was under $75.
Tip: You would, however, need to document these items in your diary. A good tax diary is essential in order to audit-proof your records. Adequate documentation shall consist of amount, date, place and essential character of the expense.
Example: If, however, Tim stays in the Bate Motel and spends $22 on lodging, will he need a receipt? The answer is yes. You need receipts for all paid lodging.
Tip: Not only are your on-the-road expenses deductible from your trip, but also all laundry and dry-cleaning costs for clothes worn on the trip. Thus, your first dry cleaning bill that you incur when you get home will be fully deductible. Make sure that you keep the dry cleaning receipt and have your clothing dry cleaned within a day or two of getting home.
4. Sandwich weekends between business days.
Interestingly, the IRS notes that if you have a business day on Friday and another one on Monday, you can deduct all on-the-road expenses during the weekend.
Example: Tim makes business appointments in Florida on Friday and one on the following Monday. Even though he as no business on Saturday and Sunday (other than monkey business), he may deduct on-the-road business expenses incurred during the weekend.
5. Make the majority of your trip days business days.
The IRS says that you can deduct transportation expenses if business was the primary purpose of the trip. The majority of the days in the trip must be for business activities. Otherwise, you cannot make any transportation deductions. This is an all-or-nothing proposition.
Example: Tim spends six days in San Diego. He leaves early on Thursday morning. He had a seminar on Friday and meets with distributors on Monday and flies home on Tuesday, taking the last flight of the day home after playing a complete round of golf. How many days are considered business days?
All of them. (Nice work, Timmy!) Thursday is a business day, since it includes traveling - even if the rest of the day is spent at the beach. Friday is a business day because he had a seminar. Monday is a business day because he met with prospects and distributors in pre-arranged appointments. Saturday and Sunday are sandwiched between business days, so they count. Tuesday is a travel day. So every day was deductible.
Since Tim accrued six business days, he could spend another five days having fun and still deduct all his transportation to San Diego. The reason is that the majority of the days were business days (six out of eleven). However, he can only deduct six days worth of lodging, dry cleaning, shoe shines, and tips. The important point is that Tim would be spending money on lodging, airfare, and food, but now most of his expenses will become deductible.
With proper planning, you can deduct most of your vacations if you combine them with business. That can make your life a lot less taxing!