Does that title sound a bit too good to be true?
Quite frankly, it sounds like something that will put you in the crosshairs of the IRS for a soul-sucking audit. What if I told you there is a perfectly legal and by the books way to mix business travel with vacation?
What is Business Travel?
There are a few ways through which you can deduct your travel expenses, but first, let’s go over the definition of business travel. In order for an expense to be considered a “travel expense”, it needs to meet several tests.
- The travel needs to be “away from your tax home”, meaning that the travel will take you away from your regular area of business. Your “tax home” can be defined differently depending on the size and spread of your business and properties, so I recommend discussing your specific circumstance with your CPA before automatically claiming deductions. To be a travel expense, it is assumed that you must stay overnight somewhere other than your own home due to the distance. For the purposes of this conversation let’s assume the trip will require multiple overnight stays.
- Secondly, the travel must be considered “ordinary and necessary” to your business. Flying to Cancun and happening to bump into a fellow real estate investor while there does not qualify as ordinary and necessary for your business. If the trip you are on is something commonly done in the real estate industry for business purposes, you have met the ordinary test. However, it also needs to be specifically necessary for your business. If you are a buy and hold real estate investor only, you will have a hard time justifying a trip for a conference on wholesaling as necessary to your buy and hold rental business.
How do I mix vacation and business into the same trip?
So if you're able to make your trip meet the qualifications for being away from your tax home as well as ordinary and necessary for your business, how do you turn this business trip into a vacation?
In order to deduct any of the costs as business related, the majority of the days on the trip must be used for business. For example, if you are on a seven-day trip, you could do four days of business activity, and three days of vacation. It should also be noted that the days traveling to and from your home are counted as business. A day can be counted as a business day if you put at least four hours of it towards business-related activity.
How do you split out the expenses between business and vacation?
So you’ve successfully proved that your trip is away from your tax home, ordinary and necessary for your business, and it is majority business – can you deduct 100% of the costs to business?
The IRS is actually more generous with these rules than you might expect, because you can deduct 100% of the costs of the travel to and from your destination (i.e. airfare). For all other costs, they must be broken out by the day, so any expenses you incur on a vacation day (hotel, taxi, car rentals, meals) will be considered 100% personal expenses. In the same way, any expenses you incur on a business day can be deducted. I cannot stress enough that the expenses still need to be considered ordinary and necessary for your business. Good luck explaining to the IRS why it was necessary for you to rent a Ferrari to drive the 5 miles between your hotel and the conference center.
What is the most practical way to use this method of mixing vacation and business?
There are several different scenarios you can use this method with, but the easiest to pull of is usually going to be travel for educational purposes.
Take note that you must already be an active participant in whatever topic the education is if you hope to deduct it. If you are attending real estate conferences to take notes for the business you hope to launch in a few years, this will not be business travel for you. However, if you are attending conferences or seminars to help you grow or maintain your skills in your already existing business, you are perfectly justified in claiming it as an educational expense, therefore making it an eligible travel deduction.
Buying a New Property
You can also travel in order to examine properties in consideration for purchase, however, this can be a trickier method. In order for expenses to actually be deducted, you need to purchase a property in the location traveled to. Even if the property is purchased, the travel expenses may be added to the basis of the property to be depreciated rather than deducted immediately. You can still use this method, but you should plan with your CPA in order to do it correctly.
There are different reasons of travel individual to each specific facet of the real estate industry, but as long as it meets the tests given by the IRS, it may be eligible for the business/vacation mixture.
One of the most important steps to protect yourself in the case of an audit is to document everything. Ideally, you can have documented itineraries and schedules for the business portion of the trip, even as much as an explicitly stated business purpose for the trip.
If you have correspondence with your CPA prior to the trip discussing the trip, save those records with time stamps as further proof. You can have the best business reasons for travel, but if the only documentation you have to offer the IRS during an audit is some notes from a seminar jotted down on a napkin, you may be looking at a very hefty cost for a few days of vacation.