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   Plan Ahead 
   To Maximize Deductions

Self-employed business travelers have a golden opportunity to combine business and pleasure with tax-saving results. As you know, you can write off ordinary and necessary expenses when traveling away from home on business. But how much can you deduct if you go on a business trip and add a few extra days of

vacation? The answer depends on several factors but you might be able to maximize your deductions by planning ahead.

Here are some tax-smart strategies when your travel destination is within the United States:

 Deduct All Transportation Costs Even While Vacationing Part of the Time – IRS guidelines allow self-employed individuals to deduct 100 percent of their transportation costs for travel within the United States. The catch: The primary reason for your trip must be business, rather than personal pleasure. On the other hand, if vacation is the primary motivation for your travel, you can’t deduct any of your transportation expenses, even though you may conduct substantial business during the trip.

Tax-smart strategy: Go ahead and mix in some vacation days during trips taken mainly for business purposes. That way, you can deduct 100 percent of your transportation expenses and stay within IRS guidelines. Transportation expenses include plane tickets, the cost of getting to and from the airport at both ends of the trip, and luggage handling tips. The same rules apply if you travel by car or rail, rather than by air.

How do you determine if the purpose of a trip is primarily for business or pleasure? There are no concrete rules but you can claim a trip is mainly for business when your business travel days exceed your personal travel days.

 Count All Eligible Business Days – So what is considered a business day? According to the IRS, you can count travel days as business days. Of course, you also count days when you spend the bulk of your time during normal business hours working. And you can include weekends and holidays that fall between business days, as long as it is impractical for you to return home on those days.

What about standby days when the customer or client requests that you stick around just in case you are needed? Those count as business days too, whether or not you are actually called in to work. Finally, days that you intended to work but could not for reasons beyond your control also count as business days. For example, your meeting might be canceled because the power goes out or your customer falls ill.

The payoff for all this counting of days comes when you can plan your trips to include more business days than personal days. As long as that basic guideline is met, you can deduct all your transportation costs even though you may spend a good amount of time playing golf and hanging around the pool.

Tax-smart strategy: Keep a log and carefully chronicle all your business activities, including the date and amount of time spent on each one. If you get audited, the IRS will want to see proof of what you were doing during any travel you claim was for business. Good records are your best defense.

You can also deduct all your out-of-pocket expenses for business days during your trips. So hotel bills, cab fares, seminar fees, and the like are fully deductible. You can deduct 50 percent of your meal costs for business days. As you might expect, out-of-pocket expenses for personal days are generally nondeductible. However, there’s a big loophole for Saturday night stay-overs, as you are about to see.

 Use the Saturday Night Stay-Over Loophole for Bigger Deductions – Although it seems almost too good to be true, you can use the Saturday night stay-over rule to gain even more deductions when you mix pleasure with business travel. Here’s how. If staying over on Saturday night reduces the airfare for your business trip, you can deduct the out-of-pocket cost of staying the extra time even though you spend it vacationing. Just make sure the extra cost of the stay-over is less than or equal to your airfare savings. (IRS Private Letter Ruling 9237014.)

For example, let's say you leave Thursday morning on a trip to attend business meetings that take up most of that day and Friday morning. You then stay over the rest of Friday and all day Saturday before returning home late Sunday afternoon. By staying over Saturday night, you reduce the airfare cost from $1,700 to $600. Your additional out-of-pocket costs for meals and lodging on Friday night, Saturday, and Sunday total only $550 ($350 for the hotel and $200 for meals).

Thanks to the Saturday night stay-over loophole, you can deduct your meals and lodging for all out-of-town days (subject to the 50 percent rule for meals). And you can deduct all your transportation costs, because the trip was primarily for business purposes.

 Bring Your Spouse Along – Unless your spouse is an employee of your business, you can't deduct his or her airfare. But you don't have to settle for deducting half the hotel bill. You can write off the cost of what you would have paid traveling alone. In other words, the single room rate rather than the double. Let's say the hotel charges $150 for a double room and $120 for a single. You can deduct the $120, rather than half of the double rate ($75). To prove your deduction, ask the hotel for a room rate schedule showing single rates for the days you're staying.

What if you pack the kids into the car for a combined business-vacation trip? You can deduct the total cost of driving back and forth since you would have incurred the same expenses if you were traveling alone.


   A Tax-Favored Trip

A “working condition fringe benefit” is tax-free to your employees and deductible by your company. To qualify for this tax-favored treatment, however, the expense must be “ordinary and reasonable” under the circumstances. In addition, if the benefit involves recreation, amusement or entertainment, the expense

"Ordinary and Necessary"

    Not all companies are successful in carrying out tax-favored recreational activities. In another case, a firm sponsored a Super Bowl weekend for employees and customers in New Orleans. Spouses and
children were invited. The Federal Circuit Court ruled that the $103,000 spent on the trip was not a ordinary and necessary business expense that was directly related to, or associated with, the active pursuit of its business. The court emphasized that the weekend "appears to have been little more than a group social excursion with business playing a subsidiary role."  (Danville Plywood Corp,, 899 F.2d 3, Fed. Cir. 1990)
must be directly related to — or associated with — your business.

The IRS frequently questions corporate entertainment deductions but as one case illustrates, taxpayers taking significant write-offs can prevail.

Facts of the case: For 40 years, Townsend Industries conducted an annual two-day sales meeting at its headquarters. Following the meeting, the Iowa printing press manufacturer sponsored a fishing trip for all of its staff members at a resort lodge in Canada. Generally, about half of the employees attend. The activities at the lodge included fishing and golfing in groups. By mixing up staff from different departments in this relaxed environment, Townsend stimulated business discussions.

The IRS challenged the company’s deductions and claimed the benefits to the employees represented taxable wages. In other words, a portion of these wages should have been withheld for income tax, Social Security and Medicare taxes.

After a series of twists and turns, the case wound up before the Eighth Circuit Court, which ruled that the cost did qualify as a working condition fringe benefit 

Here are the reasons cited by the court:

 The employees viewed the excursions as a regular part of their business routine. "Although the trips were voluntary," the court noted, "nearly all of the Townsend employees who testified felt an obligation to attend and some felt that it was part of their job."

 The outings were limited to employees only. No spouses or children were allowed. This was additional evidence that the trips were not "some sort of paid vacation," the court stated. 

 Specific business activities were included as part of the trips. The court noted that employees and salespeople were exposed to Townsend products, a new product was initiated and subsequently introduced, and current business practices were discussed at length. (Townsend Industries Inc., CA-8, No. 02-3756 9/15/03)


This decision should not be viewed as carte blanche to sponsor tax-advantaged recreational-type activities for employees. In fact, the court insisted the ruling does not mean that "in all cases in which a corporation sponsors hunting, fishing, or other trips to 'luxury' vacation spots, the sponsoring corporation can avoid including the per-employee cost of the trip in its employees' wages merely by presenting testimony relating to business allegedly conducted during the sojourn."

It’s recommended that you adopt a formal agenda for business discussions and record any significant developments or resolutions. Consult with your tax adviser for more information

Virtualex.com Ronald J. Cappuccio, J.D., LL.M.(Tax) 1800 Chapel Avenue West Suite 128 Cherry Hill, NJ 08002 Phone:(856) 665-2121      Fax: (856) 665-9005 Email: ron@taxesq.com
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