GPSOLO April/May 2010
Writing Off Your Vacation
I have a distinct recollection of the first vacation that my husband and I took after starting our law practice. At one point, as I was getting ready for dinner, I heard my husband promising a client, “I’ll get that report right out to you.” I argued, “Oh, no, you will not! We are on vacation.” You know, I’m sure, how the rest of the story went: The client eventually got the report and I got a very nice dinner.
The reality is that although it’s healthy to take “work-free” vacations, when you’re the boss, it’s rare that you have the luxury of spending weeks away from your office, your cell phone, and your laptop. Mixing personal and business time on occasion is inevitable. That makes it especially tricky come tax time to distinguish which expenses are purely business—versus personal—for reporting purposes.
To figure out how to classify your expenses, consider why you chose to go to that location at that particular time. To qualify as a business trip, the purpose of the trip must be “primarily” for business. You must be in that particular location at that particular time for a business purpose.
Using your laptop to check your e-mail from the sands of Aruba doesn’t make it a business trip, even if you check your e-mail all day long. But traveling to Aruba for a conference or to meet with a client is a business purpose, even if you spend some time enjoying yourself on the beach (there’s no rule that says a business trip has to be miserable).
If the primary purpose of the trip is for business, then you may deduct your business-related expenses, including travel. This would include travel by airplane, train, bus, or car to your business destination; different rules apply for ship travel. Costs for taxis and airport limousines, baggage, and tips are also deductible. Additionally, you can deduct your lodging and meals if your business trip is overnight. But keep in mind: You cannot deduct expenses that are lavish or extravagant. Expenses must be reasonable based on the facts and circumstances.
Document your expenses well: The Internal Revenue Service will want to know who you met with, what you did, and how it’s related to your business. Receipts or other records should separately state your travel expenses as well as the dates of each trip. Include your destination and the purpose of your trip.
But be careful. A business purpose doesn’t mean all of your expenses are deductible. Although it’s a nice perk to take a SCUBA lesson or enjoy a daiquiri on the beach, these expenses don’t become deductible simply because you’re on business. They remain personal. Any personal expenses, including travel expenses for your spouse (unless you’re lucky like me and happen to work with your spouse) should be separately stated on receipts to avoid confusion or the temptation to commingle. Better yet, use separate credit cards. Using your firm credit card to pay for business expenses and your personal credit card to pay for sightseeing and other personal expenses helps you keep the accounting neat and makes tax time easy.
If faced with a tricky expense—say, that rock-climbing expedition that you went on with the client—consider the IRS definition of a deductible business expense: it must be both “ordinary and necessary.” An ordinary expense is one that is “common and accepted in your trade or business.” A necessary expense is one that is “helpful and appropriate for your trade or business.”
While rock climbing with a client might not be “ordinary,” accommodating clients, especially at their place of business, certainly is. And depending on what you talked about while out on those rocks, it may well be “necessary” for your practice. Be sure to document who you were with, why you were there, what you talked about, and the length of your business discussion.
Of course, most of us rarely jet off to exotic locations to meet clients. It’s more common that we find ourselves working while on an actual vacation, one that couldn’t possibly be classified as a business trip. While it’s clear that you can’t deduct your travel expenses for your personal vacation, all is not lost. You may still be able to deduct business expenses for your working time on vacation.
Remember that expenses normally classified as business expenses while at home don’t lose their character when you’re on vacation. Data and phone charges remain deductible. Postage, shipping, and office supplies remain business expenses, even if you’re paying for them outside of your office. And don’t forget the extras, such as WiFi charges to check e-mail and respond to clients.
My husband and I understand that no matter how often we say that we won’t work on vacation, we probably will—just a little. We’ll both pack our laptops and swear we won’t look at them. We’ll both make a business call or two. And we both know that I have the Tax Code on my iPod for just these occasions.But we do try to find balance. We choose destinations where there is little opportunity to check the Internet and our phone coverage is ridiculously spotty. And in the midst of it all, once or twice during our stay, we find a little café where there’s coffee and wireless, so that we can work for a minute or two to get it out of our systems—and then expense it and walk away.