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Who wouldn’t want their travel to be tax-deductible?
Here’s the basics of the rule: If your trip is primarily for your business, then it is tax-deductible. If it’s not primarily for your business, it’s not tax-deductible. Sorry, but unfortunately your personal trips are not tax-deductible for your real estate business.
Well, like we said, if the primary purpose for your trip is business and you can prove it, through good planning and documentation, then even going to Dubai and visiting the Burj Khalifa while you’re there can be tax-deductible.
Business Travel Expenses
So, how do you maximize a business trip while still getting in some relaxation and adventure? Let’s first look at how the IRS defines business travel expenses: “Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.”
There are five key phrases the IRS uses regarding business travel deductions that I want you to be familiar with:
- For your business – again, if your travel is not for the purpose of business, then the rest doesn’t matter.
- Ordinary – common for your industry
- Necessary – helpful and appropriate for your business.
- Traveling away from home (aka “tax home”) - the entire city or area where your main place of business is located, regardless of where your family is.
- Travel must be “temporary” (less than one year) – if your work assignment is longer than one year, it’s considered indefinite.
Keep in mind that there is a distinction between transportation expenses and travel expenses. Transportation expenses, which are also tax-deductible, usually relate to the cost of traveling between your home, your main place of work, a second job, or a temporary work location. What we’ve been discussing so far are not those costs, but rather the costs of traveling away from home.
Applying Business Trip Tax Deduction Rules to the Real World
Let’s use my friends Greg and Andrew as examples to see how two similar people (both real estate investors), going to the same place, at the same time, can have two different outcomes when it comes to business travel deductions.
Greg and Andrew are friends and real estate investors – each of them jointly own a few rental properties with their respective wives.
We’ll start with Greg. Greg likes learning about new cultures and wants to see the world. After finding a steal on airfare to Florida, Greg and his wife decide to jet away to the beach for a few days without emails and traffic.
While there, Greg reads about a real estate conference in town and registers for it. After learning about the area from a new acquaintance at the event, he decides to do some exploring: He meets up with the local REIA (Real Estate Investors Association) group, and walks through a few properties with a local real estate agent and has business lunch with a real estate tax guru, both of whom he serendipitously met at the conference.
Now on to Andrew. Andrew has spent countless hours researching and discussing the tax implications of his business with his CPA. His CPA made him aware of the rules of travel expenses and how they can be tax-deductible only under certain circumstances. So, Andrew plans for his trip.
Before going, Andrew does some research on real estate conferences happening in the area. He registers online for a conference, and plans his time there including: a meeting with the local REIA group, a walkthrough of some properties with an agent, and a meeting with a real estate tax guru in the area who his CPA recommended. This planning allows him to explore the possibility of a real estate investment in Florida while still maximizing the time he can spend with his wife taking in the sun.
Is Andrew’s travel to Florida tax-deductible? Yes, because Andrew’s primary purpose for his trip was business-related and he happened to fit in some R&R while traveling. Greg, however, fit in some business while on vacation. So, no his airfare and accommodations wouldn’t be covered (although some of his costs associated with the conference, and the business conducted while there could be deductible).
Now a Life Hack for Your Next Trip
One strategy I like is commonly referred to as the “weekend-sandwich strategy.” The idea is simple, sandwich your weekend vacation between your business appointments.
Let’s say Andrew - the one who plans his business trips beforehand - and his wife fly to New York City on a Thursday. Friday morning, he meets with his lawyer regarding the legal entity structuring for his properties, and he spends the evening looking at potential properties with a real estate agent. Saturday and Sunday, he and his wife tour the city, visiting the World Trade Center, the New York Stock Exchange, and the Statue of Liberty. Monday morning, he visits with a local landlord to discuss leasing office space in Manhattan and they fly home Tuesday afternoon.
Since Andrew had more business days than he did personal days, the trip can be deemed a business trip, making the travel to-and-from deductible. Thursday, Friday, Monday and Tuesday are all business days. In this example, Saturday and Sunday are personal days, and the expenses on those days are not business-related so they’re not tax-deductible.
The key to ensuring that your trip is covered and free from future headaches is to document your expenses well. If by chance you are audited, documentation gives clear evidence that what’s on your tax return is truly a tax-deductible transaction. Keep good records as evidence of your tax-deductible expenses; I personally like to keep photo of receipts rather than physical paper copies.
Make the most of business trip tax deductions by planning your next trip in advance so you can take advantage of the write-off strategies available to you. If you are interested in learning more about business travel deductions or tax strategies for your real estate business, reach out, we’d love to hear from you!