Travel has been minimal this year, but people are once again venturing out. As you begin making your plans, consider whether or not you can mix business with pleasure and deduct even a portion of your trip.
Learn more during this live panel discussion, led by Will Gardner, in which Tom Gibson, CPA, and Kami Elhert discuss the requirements for deducting your travel, including:
Transcript (edited for clarity)
Will Gardner: Hello and welcome to today’s webinar, Combining Business with Pleasure: Utilizing the Travel Deduction. I’m Will Gardner. With the challenges of covid-19, travel this year has been minimal for most of us. But, with the holidays right around the corner, many of us are ready to venture out and visit loved ones.
As you begin making your plans, you may want to consider whether or not you can mix business with the holiday travel and deduct a portion of your trip. Today’s panel discussion will be led by Tax Saving Professionals’ Senior Tax Strategist Tom Gibson and Tax Saving Professionals’ Client Relationship Manager Kami Elhert. Tom, say hello to everyone.
Tom Gibson: Good to speak to you all this afternoon. Most of you know me, but for those who don’t, my name is Tom Gibson. I’m one of the CPAs here at the firm. I have been in accounting for over 30 years. I was originally licensed as a CPA in Tennessee back in 1991, and I also have a license here in Florida. I spent about 12 years in public accounting and then did a turn through the corporate accounting world. For the last nine years, I’ve been with TSP doing tax planning. Again, good to have you with us today and look forward to our talk. Now for the person who actually does the work and doesn’t do all the talking. I’d like Kami to introduce herself.
Kami Elhert: Thanks, Tom. I am Kami Elhert. Most of you probably know me, but if you do not, I am a Client Relationship Manager here as well as a paralegal. I like to consider myself the documentation guru in our company. I look forward to the webinar today and talking a little bit more about travel, what can be deducted, and how to get those deduction.
Gardner: As Kami alluded to, they’re going to be discussing the requirements necessary for deducting travel and, more importantly, things to avoid so you don’t have any issues.
With that, let’s get started. Kami, everyone’s always asking about deductions. How do you deduct the trip? The first question a lot of people ask is, “How can I deduct an entire trip? What’s the process? How do I go about that?”
Elhert: One of the first things that Tom and I always recommend is planning.
Planning for business travel is key to making sure that we are utilizing the deduction at the best use possible. I consider an ideal travel time to be Thursday to Tuesday. And I say this because we’re talking about how many hours of actual work you have to do in that five-day vacation.
The IRS considers a business day 8 hours; to receive the full deduction for the entire day, you have to fulfill at least 50% of that requirement, 4 hours. If we start travel on a Thursday, that’s your travel day to get to your location. Any travel that you’re doing will probably take at least 4 hours from doorstep to doorstep. So, that day is considered a workday and you’ve reached the criteria that the IRS looks for.
Friday we really want to plan what type of business will be done, and we do need to meet that 4-hour requirements. One thing to keep in mind is that the 4 hours on Friday do not have to be consecutive four hours. Have a business lunch with an associate discussing maybe a partnership in the future or something of that sort, and that takes an hour. Then, maybe in the afternoon, have your corporate photo shoot with your family. That will maybe take another 2 hours. And then wrap up the day going over items that an annual meeting would need to include such as discussing key roles or going over your accountable plan and making sure your documents are in place.
So, we’ve actually met that 4 hours without having to stress out the schedule. But you do have the option to actually do it all in a 4-hour chunk as well.
On Saturday and Sunday, you actually get layover days, which means the IRS considers it pretty ridiculous that you would have to leave Friday if you had business to conduct on Monday. You actually get layover days as long as you have business on that following Monday.
Monday should almost exactly mimic Friday. We have to meet that 4-hour threshold for the IRS with business purposes and then Tuesday, again, would follow the same routine as Thursday, which would be your travel day. You’ve met the criteria there.
If you think about it, we’ve now maximized a 5-day vacation and only completed about 8 hours of work. You’ve now also met the criteria for 100% of the airfare, car rental, lodging, and 50% of the meals to be deductible; and that includes any baggage fees associated as well. That’s a really great way to maximize and plan ahead for travel, especially with the holidays coming up.
If you get with your team here at TSP, we would be more than happy to sit down with you and really structure the travel accordingly, so that way we can maximize that deduction for you.
But, Tom, there are other ways if we don’t meet the 4-hour criteria, correct?
Gibson: Absolutely. When we think of business travel, most of the time we think of it as we are going to go see someone. But a lot of you have your college age children on the payroll. They are going to be coming in for the holidays. Remember, they are employees. And while they’re home for the holidays, they’ll be required to participate in corporate photo shoots, have their performance review, and a number of other things. Those plane tickets coming home are deductible; or the mileage when they’re driving home, that’s deductible as well. You just need to reimburse them for those expenses. So that’s another way to utilize the travel deduction.
Kami indirectly brought up a great question, “What if I don’t get to the 50% business activity limit?” Two things about that. Number one, sometimes vacation is just a vacation. And that’s OK. You’re not going to be able to convert those vacation expenses. You’re just not and don’t feel like you have to.
That being said, let’s say that I get to the end of my trip, and I only spent 40% of my engaged in business activity. Well, at 50%, we get everything, 100% of the lodging, 100% of the travel, 50% of the meals. At 40%, we have to start pro-rating. We get 40% of our plane tickets and rental car. We get 40% of our hotel and we get 40% of half of our meals. It’s not an all or nothing proposition. The 50% limit is simply the point at which we don’t have to pro-rate anymore. We can take the entire expense, with the exception, of course, of entertainment. Entertainment expenses completely disappeared with the Tax Cut and Jobs Act.
Who on the call besides me knows when business meals and entertainment went to 50%? The Reagan Tax Cut Act 1986. I was working in CPA firm, and as of that point you couldn’t deduct country club dues and 100% of business meals and all that good stuff. It took them a while, but they finally killed it with the Tax Cut and Jobs Act.
Elhert: But with that, Tom, even though it’s not deductible, it is reimbursable, correct?
Gibson: Yes, absolutely. The business can pay you for it, but the business can’t deduct it. And obviously you can’t deduct it at the level of your personal return anyway. So, to whatever extent we get a deduction, we want the business to reimburse you.
Elhert: Just going along with some of that planning that we were talking about, a really important tool that your team here at TSP does provide you with in your portfolio as well as on your flash drive is an annual business information request sheet. This document is really important for planning and for enabling your team to maximize and structure your meetings for you.
But I’m talking about this as far as planning. This document also can be used in the past tense. We use this for travel that may have occurred pre-COVID. I know we only had a few months in the beginning of the year, but if you did any travel over the New Year, during February, some of early March when there was still travel without any restrictions, this is just another way to provide us with the information that we need to provide the meeting minutes and the waivers for the deductions. This is a 3-page document and the important information that your team here at TSP is looking for is located on the first page. We really want to know, and need, the addresses, dates of travel, who attended, topics, and days that you did not conduct any business and were purely personal. We need all that information to make sure that your meeting minutes and your documentation support your deduction.
Pages 2 and 3 of this document provide added structure to those meetings. It’s always great to review some of these items every year as a business owner anyway, but this will really help us add depth to the annual meetings. Annual meetings may only take maybe 10 minutes, right Tom? You basically just review your bylaws but being able to add business structure to the meetings is a way that we can maximize the time as well.
In addition, you want to make sure that checks are written out and reimbursements submitted before December 31.
Gardner: Tom, are there restrictions as to where you can travel, whether it’s for the holidays or just vacationing, or are there any restrictions that would prevent you from utilizing a business travel deduction?
Gibson: I wouldn’t necessarily call them restrictions, but domestic travel is always going to be easier to write-off than foreign travel. For domestic travel, it’s going to get cold soon and hopefully the virus is going to wane a little bit. Those of you with younger children are going to hear the call of Disney in Orlando in January, February and March. You might want to come down this way and perhaps stop off and visit with us a little bit in our offices. Well, that’s an easy case to make. That’s a corporate planning retreat.
Now, going to Paris or to Cabo is a tougher case to make because you have to have an ironclad business purpose to be in a foreign country. We do have a client who is going to Mexico, but they have some legitimate business reasons to be in Mexico. It’s not that you can’t deduct foreign travel, it’s just that we’ve got to have a slam dunk reason that you have to be in that country specifically for business purposes. It doesn’t mean if you make the 4-hour requirement that you can’t enjoy the rest of the day sightseeing. It’s just that you have to have a substantive reason to be there other than just having a meeting. So that’s a good question.
Elhert: If you do travel internationally, Tom, are you able to travel to Paris if you were actually performing business in another country abroad? Would that be deductible?
Gibson: That’s a great question, and we had this happen a couple of years ago. Two of my clients, both physicians, went to London and then went on to Paris after. The London leg of the trip we weren’t able to deduct because it was just a vacation. When they went on to Paris, the wife went to a teaching hospital in Paris and learned about a new procedure. And, so, for that part of the trip, for her expenses, we were able to write part of that off.
Given the choice between getting a 20% deduction versus a 0% deduction, I’d like to get the 20% if we can. It really goes to the issue of how much effort you want to put into things and whether or not you think the juice is going to be worth the squeeze in what you have to do to get it. But let’s say that you had a business on eBay selling antiques and you went to France and the UK on a buying trip. Then you sold those items you acquired while you were on the trip through your eBay store, your Internet venue. That works, but again, you’re going to add a step or five into the process to get that trip deductible.
Gardner: And Tom or Kami, what if you’re traveling by automobile? Can you deduct the mileage? How does that work?
Gibson: Yes. If it’s a business vehicle and we’re already writing it off in the business, those additional miles would just go into your regular mileage calculation and come up with your business use percent.
If you’re using the standard mileage method and you’re just reimbursing yourself for the number of business miles you put on the vehicle, then yes, you would just use the standard mileage rate to reimburse that.
Gardner: And maybe, during the holidays, you want to go on a cruise. Is this deductible? Can you write that off?
Gibson: Well, kind of. Cruises used to be much easier to write-off. Basically, there are a lot of rules pertaining to cruise ship travel. Really, the only way that you’re going to be able to get any kind of a deduction is if it is a seminar of some type or continuing education. Some type of business convention might be another way to do this. The maximum amount that you’re going to be able to deduct per year is $2,000. And if you can find a $2,000 cruise that you want to go on, then God bless you. Enjoy yourself. But most of them are going to be a little bit more than that.
The maximum we can deduct is $2,000 and there are even more conditions. First, the convention or the meeting has to be directly related to your trade or business. Second, the ship needs to be a U.S. flagged vessel. It needs to be registered in the U.S. Again, if you’re cruising in the in the Caribbean, good luck finding a U.S. flagged vessel. Plus, all of the ship’s ports of call have to be in the United States or its territories. So again, if we’re in the Caribbean, that means the U.S. and the U.S. Virgin Islands are where you can go.
You have to attach a written statement to your tax return, that you must sign, that talks about the total number of days for the cruise, the number of hours each day devoted to the business activities, and you have to attach a program from the convention sponsor that outlines the times that were spent in sessions. And you also, if it’s continuing education, have to attach a written statement signed by an officer of the group who is sponsoring the continuing education that again reiterates the business activities and the total number of hours that you attended those activities. It’s a lot of work for a $2,000 deduction. It can be done, but those are the rules.
Gardner: In essence, the short answer is absolutely, maybe.
Gibson: Yes! But here are the 49 conditions for you to be able to do so!
Elhert: The other thing that I do want to bring up is record and receipt keeping. It’s very important when you’re traveling for business. Very important. And there are a few little tricks that we like to let our clients know about for those business meals. Business meals are what we consider low hanging fruit for the IRS. They know that everybody’s very busy these days. And who has time to actually keep their receipts, let alone actually see the ink on them? So, you end up throwing them away. You’re not exactly sure where you went or who you had lunch with when it comes tax time. We really recommend downloading a few apps that make the recordkeeping really easy.
Shoeboxed is one that we are huge fans of. Shoeboxed works with the cloud. If you’re having lunch or dinner with your family, or a business associate, and talking about business, after the meal pull up the app, take a picture of the receipt, and type in a little synopsis. “Had lunch with Dr. Jones and was discussing the Invisalign technique.”
The data is now in the cloud. But, if you have QuickBooks, it integrates into your QuickBooks system, which makes it really great and easy for bookkeeping purposes. You’re able to have reports readily available for your tax professionals and the documentation is already supported.
Another app that we really like is MileIQ. If you have the Microsoft office suite, you have the full version of this app because they were bought out by Microsoft. MileIQ runs in the back of your location. You start your car, go on your trip and, once you turn off the car, the app will actually open and ask, “Was this business or personal?” Swipe one way for business and the other for personal.
Then, weekly, monthly, quarterly, it will send you reports based on the app. Every week you’ll get a report that you drove this many business miles. And again, a really easy way to provide that documentation and record it the way that the IRS is requiring for these deductions, and a way to further backup that the deductions are being taken correctly.
Gardner: I think those are all very important points. I often say to clients and prospective clients that a receipt is just evidence that you spent money. It’s not evidence on what you spent it on or that it was spent with a business purpose. And without those apps, I hear you always recommend making a little note on a receipt at least, because later on when you’re having a conversation with a revenue officer, a conversation is not historical record. You’re not going to pull out a receipt and have a verbal explanation; that’s not going to hold water. Again, these are very easy ways to do that. With that, perhaps we should take a couple of questions. Kami, you were talking earlier about maximizing a 5-day vacation based on Thursday through Tuesday. Does that mean, in order to do these things and write them off, they always need to be a 5-day vacation?
Elhert: No, they don’t. That is just the way we really see the least amount of business that you can do for the rules to still apply. That was just an example and one way to really maximize 5 days with 2 layover days crunched in there. So, you’re really only conducting that 8 hours’ worth of work. And we do want to keep in mind that we do need your weekends to be sandwiched, because if they’re not in there, you do not get the lay over days, unfortunately.
Gibson: Yes, because if we travel on Friday, or worse we travel on the weekend, the clock starts running on Monday and we’ve got to get 4 hours for every 1 of those business days. So, the way to get the most deductions for the least effort is to travel on Thursdays and Tuesdays. But we’ve got to have business on Monday and Friday.
Elhert: For a longer trip, a lot of structuring, a lot of planning is required. And pro-rating may just be the way to go. Like Tom said earlier, sometimes vacations are vacations. But with that being said, we do want to also keep in mind if it is a vacation, that’s a great time to use frequent flyer miles. We absolutely recommend the business reimbursing for the travel versus you utilizing your frequent flyer miles or free miles or something of that sort.
Gibson: And there are some other common questions that come up a lot. One is, “What qualifies as business travel?” And there are lots of different ways to do that. Obviously, we talked about a corporate planning retreat. That certainly qualifies. If you invest in real estate, part of the way that you can fill out that 4-hour time might be to go and look at some properties in the area you’re visiting that you might be interested in purchasing.
The other explanation that we get a lot is, “I won’t have any trouble meeting that 4-hour requirement because I’m constantly answering emails and phone calls from the office when I’m on vacation.” Unfortunately, I can’t make the case of why you had to travel 400 or 500 miles to answer emails. I know you do, and I don’t doubt it at all. We’re all tied at the hip to our cell phones and the office, but that doesn’t count. We can’t count that toward the 4 hours.
A lot of times folks will ask, “My family is going to be coming with me. What about their expenses? Can we write those off?” And the answer is, if they’re employees or if we have a business relationship of some type, employee is the easiest one and the most common, yes. Now I’m going to step back to the cruise example, though. If it is a continuing education cruise, the only person whose expenses will be deductible is the person who is required to attend the continuing education to maintain their professional license. Unless your four-year-old needs to get up to speed on dental implants, then their expenses are not going to be deductible or your spouse’s, if they’re not obviously a professional license holder. If it’s a corporate planning retreat, and we’re going to do a corporate photo shoot and things like that, then absolutely. You can get the entire family’s expenses deducted.
Gardner: Tom, you mentioned that taking phone calls and doing emails is impossible to justify as a business purpose for travel. But what if you are traveling and holding Zoom meetings elsewhere. What about that? Does that count as business time?
Gibson: Well, I think I think we can probably get away with that right now. We do 98% of our meetings with our clients by Zoom and have long before the virus came about. I think you certainly could make that case as far as meeting the 4-hour requirement. I still think we would need some other activities like brainstorming the marketing plan, working on the budget, things like that, where we can make the case that it was good to get away from the office to be able to work on things. But as far as hitting the 4-hour requirement, if you have to have a Zoom meeting with a client or with your office staff and they have to be back in your home location and you’re in Orlando, I wouldn’t have any difficulty signing off on a return that included that as part of the 4 hours. But it can’t just exclusively be that, because then you’re right back to the question of, “Why did you have to come to Orlando to do that?”
Gardner: So, if a client wanted to schedule their planned session with the TSP tax team and they wanted to do it poolside or beachside to make us feel really sad that we’re not with them, they could do that. And they can write-off the time.
Gibson: Yes, you could. And another little wrinkle on that, I have had clients who would use a meeting with our team as an occasion for one of their tax-free rent meetings, as well, if they were doing it from their home. I definitely that would work.
Gardner: Wonderful. We’ve got time for one more question and I want to squeeze this one in because I think it’s a good one and then we’ll wrap up. The question is, it’s a statement than a question. “Up until this year, I traveled extensively out of the country for my employer, and I plan to do so again this year, hopefully. But I’m a W-2 employee. Are these travel deductions applicable to W-2 employees?”
Gibson: Not really. The best you can hope for is to have an employer who will, if it’s going to be a business trip, either pay and buy your tickets for you and make your hotel arrangements or that will reimburse you for those expenses. But it’s like so many other deductions that fall under the rubric of scorecard deductions. To be able to benefit from those, you have to own a business. Back under the old unreimbursed employee expense rule, you might have a sliver of hope of getting to deduct things like that if you didn’t get reimbursed. But again, that went by the wayside with the Tax Cut and Jobs Act.
Elhert: With that though, are 1099 employees, independent contractors, able to take the deduction?
Gibson: Yes, if they are an independent contractor. A lot of folks, though, I’ve noticed will put 1099s under other income. That’s the line they’ll drop that in on the tax returns. And, to my thinking, that’s the worst place to put them, because if you put them on the Schedule C, a sole proprietorship, then you have the ability to take some deductions against that income. So, if you’re getting 1099 income and you’re primarily a W-2 employee, but you’ve got a little bit of 1099 income coming from somewhere, unless you’re totally disinterested in taking any deductions, I would probably report that on Schedule C and write some of it off.
Gardner: Tom, that’s what our clients love about you. You think outside of the box, you’ve got all these little tricks. All right, before we wrap up, Tom or Kami, is there anything else you want to add? Anything we’ve missed?
Elhert: I do think that most importantly, please let your team know if you have had any travel or if you have travel upcoming. Please let us know if there’s any reimbursement requests that are needed. I encourage you to reach out to your team, make sure that we have everything buttoned up, and checks written before December 31 comes because, as you know, that day comes and rolls over and you miss out on that opportunity. This is really just a second nudge to make sure that you let your teams know of any travel or any documentation that you may need for that deduction to take place this year.
Gibson: Travel is one of the things that we’ve just been very successful with over the last 20 years, of taking a trip that sure does look like a family vacation but, if we add just a little bit work to it, converts it into a legitimate business expense.
As Kami said, it’s always easier to plan than it is to try to retrofit a trip. We’d love to hear from you and talk for 10 or 15 minutes before you go on the trip, because that way we can tell you, for example, pay for this with your personal card, or pay for it with the business card because you’re going to be able to write this all off and kind of step out the process. It’s easier to spend 10 minutes at the beginning and be proactive, then spend an hour and 6 emails after the trip trying to make something work.
Gardner: That was very informative. I’m sure our clients got a lot out of it. And I want to thank our esteemed panel, Tom Gibson and Kami Elhert, as well as everyone joining us today. And again, as Tom and Kami said, if you’re planning a trip for the holidays or any trip at all, just reach out to your team here, to your client relationship manager, to discuss the specifics of your trip and begin the planning process. Ten- to 15-minute conversations can really make it very easy for you to take advantage of every opportunity and save you a lot of money as well. You want to ensure you’re doing everything you can to maximize your deductions. From all of us here at Tax Saving Professionals, we wish you the best.
To learn more about how you can implement the travel deduction and other deductions, contact us at (772)257-7888.