Note: Tax rules are complex and filled with hair-splitting nuance. The information shared in our travel articles is my experienced & common-sense interpretation of the IRS phrase, Facts and Circumstances. Our goal is to help you maximize your travel deduction while steering clear of IRS scrutiny.
As we discussed in Part One of our Travel Deduction series, business trips must pass four tests to be deductible as a business expense. In this article, we will dig a little deeper into the pivotal and most challenging test to pass, number four - Primary Business Purpose.
The central motivator of deductible travel must be business, not anything else. In other words, if not for this business purpose, the trip would not occur. Proving your business purpose is essential to 1) obtaining that tax-saving deduction, while 2) maximizing personal-recreation time. A trip’s business purpose gets determined on a day-by-day basis. Either a day’s primary focus was business, or the day was personal.
Business vs. Personal Days
Planning a deductible business vacation is pretty simple on the surface: First, learn the difference between the IRS-defined business day and a personal day. Second, make sure over half of the days at your destination are business days. The challenge, however, is making sure business days are business days. Why? Non-business days are personal days & personal days ruin your deduction. If over half of the destination days are non-business, the trip is not for business, and none - zero - of your travel, lodging, and meals get deducted.
Facts & Circumstances: The major challenge in distinguishing a business from a personal day is the IRS definition of a business day. Like much of the U.S. tax code, the meaning is imprecise, subjective, and relies on Facts and Circumstances. Facts and Circumstances is an ambiguous term akin to the preponderance of evidence – the more likely than not - standard used in civil litigation.
It is the taxpayer’s responsibility to substantiate every deduction claimed on their tax return. You are the defendant in this proverbial courtroom. Every tax deduction taken on your tax return is suspect until you prove otherwise to the jury. The IRS is the Jury. Your job is to convince the jury that more than ½ of your destination days were devoted to business, not something relaxing, fun, or enjoyable.
The Smell Test: An easier way to describe the Facts and Circumstances standard is The Smell Test. The smell test distills facts and circumstances to common sense. Does the day smell of profit motive or the rotting bait of a fishing trip? Does it carry the scent of starched slacks and dress-shoe leather or the sweet coconut of Bahama Breezes and salty warmth of Boardwalk Fries?
The smell test helps experienced jurors to discern the nature of the trip. Was it for business with a little relaxation tossed in, or a vacation with a dash of business added to claim a tax deduction? Your job as a proactive taxpayer is to rub half of your destination days with enough business-musk to mask any personal enjoyment. The first step to achieving this end is understanding what a business day is.
So, What’s a Business Day?
Travel Days: Let’s start our business-day discussion with the two days (most commonly two days) spent getting to and from your destination: Travel Days. As discussed on our Four Travel Tests article, travel must take you far enough away from your tax home to require sleep or rest before returning. Travel days are automatically considered business-days provided over 50% of the days at your destination are business days.
For example, You live in Richmond, Virginia, and spend Monday traveling to Phillidelphia. You attend a sales conference on Tuesday and visit Rocky’s statue on Wednesday. Thursday is a six-hour seminar on contracts. On Friday, you travel back to Richmond. Because over 50% of your destination days are business days (2 of 3), the travel days are also business days. That’s four business days and one personal day. Because Wednesday qualifies as a Sandwich day (discussed below) all of your travel costs are deductible.
On the other hand, if only one of your three destinations days were business days, travel days are considered personal days. None of your travel-related costs are deductible.
The key to deducting travel is making as many destination days as possible business days.
Little or No Business Activity: Some days require little or no business activity to make them business days. These are listed below:
Days with Business Activity: Now, let’s take a look at other days that qualify as business days. The defining element that makes a destination day a business day is whether it was used primarily for business or something else. Generally speaking, a day consumed with business activity is a business day. A day mainly spent doing something else is a personal day. But, this generalization has many exceptions. Some activities have more business-importance than others, making facts and circumstances - the smell-test – pivotal.
There is no magic business-day recipe. There are, however, several factors to consider when blending activities to pass the business-day smell test. Here’s a list:
Level of Engagement: Are you walking around a tradeshow randomly looking at displays or becoming educated on business building tools and techniques? Did you pick up goodie bags from a few vendors to prove you showed up or obtain meaningful knowledge and contacts?
Being a sponsor, presenter, vendor, or instructor at an event also increases the business importance of the day. As does being a member of the board or planning committee organizing the event.
Take Away: Making travel costs deductible depends on proving that over 50% of your days at the destination(s) are business days. Deciding what constitutes a business day a subjective and depends on the facts and circumstances that accompany each day. It’s the taxpayer’s responsibility to convince the IRS that business days pass the smell test. Thus far in our domestic travel series, we have discussed the Four Business Tests and creating Business Days. In articles that follow, we will discuss deductible travel costs and records needed to substantiate your deduction.
This is part 2 of our four-part article series on Deducting Domestic Travel. Continue reading part three, Deducting Domestic Travel Part Three: Deductible Expenses and part four, Deducting Domestic Travel Part Four: Substantiating Business Travel Deduction.
Summary and Invite: We hope this article has helped you better understand how business days make travel deductible. If you’d like to learn more about cutting your highest cost: TAXES, check out our Real Estate Agent Tax-Cut Library. The Real Estate Agent Tax-Cut Library includes over eight hours of video broken into twenty-nine searchable volumes. It covers every possible deduction a Real Estate Agent can take on their business tax return. Our Broker Version helps entire agencies cut their taxes! We also invite you to browse our courses.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
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