I was at a real estate meet-up recently where I overheard an attendee talking about he writes-off the costs of lavish trips for him and his family. He was traveling all over the world and taking a deduction on his tax returns for the associated expenses.
Now, what he is doing most likely won't "fly" (punny, I know), but I'm not his CPA so I can't verify. What I do know is a very particular set of rules that can make or break your business travel deduction. Use them correctly, and you'll receive tax benefits when you travel. Use them incorrectly, and you could end up facing stiff fines from Uncle Sam.
Business travel deductions are a benefit to anyone who is running a business. Whether you are flipping properties or actively landlording rentals, business travel deductions can be taken against the income your business generates.
In order to determine if business travel is deductible, we must look at a number of factors. The first is whether we traveled "locally" or non-locally." If we are traveling non-locally, we must then determine if the travel expenses meet all of the rules to qualify for a tax deduction.
Read on wanderlust business owner and learn how to vacation on the government's dime.
Traveling Within Your Tax Home
When determining if you are traveling locally or non-locally we must determine where your "tax home" is. Your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.
For example, I currently live in Raleigh, NC but I have rental property in Maryland. Even though my property is located in Maryland, my "tax home" is Raleigh, NC because I conduct all of my management operations from the comfort of my home.
If you have multiple "regular places of business" then you determine your tax home by weighing the following factors:
- The total time you ordinarily spend in each place.
- The level of your business activity in each place.
- Whether your income from each place is significant or insignificant.
Deducting travel inside your tax home is not allowed, however, you can deduct transportation costs.
Daily transportation costs to and from your W-2 job are not considered deductible transportation costs as they are subject to the commuter rule. Commuting expenses are personal expenses and therefore not deductible. However, if you were to then drive from your W-2 job to your rental or job site, that mileage would be deductible. Reason being is that you are now traveling office-to-office instead of primary residence to office or office to primary residence.
If you are in business for yourself and you have a home office, meaning your residence is your principal place of business, may deduct daily transportation expenses for going between the residence and another work location (or rental property) in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance.
Traveling Away From Your Tax Home
Per the IRS, you are traveling away from your tax home if your duties require you to be away from the general area of your tax home substantially longer than an ordinary day's work, and you need to sleep or rest to meet the demands of your work while away from home. If you do not stay overnight, the trip is not considered “travel.”
Business owners and real estate investors can deduct ordinary and necessary expenses directly related to the trade or business incurred when traveling away from.
"Ordinary and necessary" expenses are those that are common, helpful, and appropriate to conduct the trade or business. For example, property management fees are both ordinary and necessary for real estate investors so they are deductible expenses. But while expenses related to a guard dog may be "necessary" for real estate investing, such expenses are not "ordinary" meaning you likely can't deduct them.
"Directly related" expenses are those that are related to the operation of the trade or business. Personal enjoyment, hobbies, and entertainment are not directly related to the operation of the trade or business.
If the trip was entirely for business, you may deduct all of your travel expenses. If your trip was primarily for business, you may deduct travel and lodging related to the business portion of the trip but cannot deduct the travel and lodging related to the personal portion of your trip. If the trip was primarily for personal purposes, you cannot deduct the costs related to the trip, but you can deduct expenses incurred while at your destination if they directly relate to you business.
To put numbers to the above paragraph, if you perform business activities every day (100% of days) you are on your business trip, your trip will be "entirely" for business. If you perform business activities for more than half of the trip's days (>50%), then your trip will be "primarily" for business. If you perform business activities for less than half of the trip's days (<50%), then your trip will be primarily for personal reasons.
You have to be careful if you are not yet in business. If you have worked hard to save up money and you are traveling to inspect future rentals you may buy, but you don't own rentals yet, then the travel is not currently deductible. Your business isn't yet "in service" or operational, thus you can't deduct the travel expenses. There are minor exceptions to this rule which will not be detailed in this article.
When you incur travel expenses when you are not yet in business, we still recommend keeping a log of these expenses. When you do enter into business, whether it be buying a rental, flip, or landing a client, we can potentially deduct your travel costs at that time as "start-up" costs.
What Travel Expenses Can You Deduct?
Again, we must revisit the ordinary and necessary rule here. This means you cannot deduct lavish or extravagant expenses even if they are related to the business you are operating. For most business owners, that means you will have to fly coach and book reasonably priced lodging.
The good news is that you can deduct ticket fares for airplanes, trains, or buses. You can also deduct the cost of luggage and public transportation as well as telephone costs, laundry, internet, and tips paid to vendors.
You may deduct 50% of the actual cost of your meals. You will have the burden of proof, so make sure to always keep your receipt. You may also choose to deduct 50% of the IRS's standard meal allowance per day. The current standard daily meal allowance rate is $51 for most areas, however, you can check out the following link for specific areas: http://www.gsa.gov/perdiem.
How Real Estate Investors Can Travel Strategically
The rules for travel are relatively broad. As long as you can demonstrate that you performed business activities and that your trip had legitimate business purposes, you're well on your way to deduct the travel costs.
As a real estate investor, you can set yourself up to deduct future vacations as business travel. If there is a particular vacation spot you enjoy frequenting, scour the geographic area for a rental property. Perhaps you build out a small portfolio in the area. Then in the future when you travel there, you can work on the property for the first handful of days and enjoy basking in the sun for the remainder of the trip.
Structuring your trips this way will allow you to deduct the airfare and a portion of the lodging, all of which you wouldn't have been able to deduct without the rental properties being local to your favorite vacation area.
Now, the rules are a tad more complicated than the above scenario, but the general idea is that you can certainly be smart about how and where you travel in the future.
Travel expenses are deductible as long as you are traveling outside of your tax home and they are ordinary and necessary costs for your business. How much you can deduct depends on the primary purpose of the trip, being business or personal. And of course, you can always set yourself up for future travel success by buying rentals in the areas you enjoy frequenting for vacation.