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.
If you’ve been following our business travel deduction series, you know that maximizing your deduction and working-vacation pleasure is an entirely doable challenge. In part one, we discussed the Four Tests that business travel must meet to get deducted. In part two, I shared the Definition of a Business Day and the planning-magic that makes weekends, holidays, and even pleasure-filled weekdays business days. Part three was all about which trip costs get deducted. In this, our final travel article, I’ll provide tips on substantiating your travel deduction. All of these articles come from our Real Estate Agent Tax-Cut Library, designed to help you cut your most significant expense: Taxes!
Three Keys to Substantiating Your Deduction
There are three keys to proving that your tax deduction for a business trip is legit. First, you must show that you took the trip for business. Second, prove the majority of your destination time was for business, not something else. And, finally, you need records to show that the amounts deducted are correct and trip-related.
Key One - Business Purpose:
The critical key to substantiating your travel deduction is proving the primary reason for the trip was business. You must show that the activities conducted were necessary, beneficial, or helpful in generating a profit. You don’t have to show sales or gains produced by the trip. Still, you need to explain the business motivation behind it and show you were serious about its potential benefits. To this end, it’s a good idea to keep any documents that may support your position, such as:
- Emails or other inquiries made about the trip
- Promotional materials for any business events attended
- An itinerary or schedule listing classes, speakers, etc
- Manuals obtained at the event
- A list of contacts made that benefit your business
- Certificates of completion or continuing education credit
- Promotional items received from vendors
- Follow-ups made to trip contacts
- A list of ways the trip improved your business
As you can see, the goal here is overarching – the big picture. The more the trip may resemble a vacation, the more critical showing your business purpose. Showing business purpose is relatively easy for a seminar on real estate sales contracts when your attendance is required five hours per day. Proving business purpose and meaningful attendance for a hot tub trade show in Las Vegas may be a bit more challenging. But, a few ounces of enthusiastic documentation can go a long way to selling its benefit to your real estate practice.
Key Two - Business Days:
The second key to substantiating business travel is proving that over half of your destination days are business days, (see maximizing business days article). The easiest way to maximize business days and leisure time is to 1) Understand how weekends, holidays, and sandwich days can become business days, 2) Plan business accordingly, and 3) Document business activity conducted on business days.
A simple method for documenting business activity is a schedule or itinerary for each business day and supporting evidence that the events occurred. This proof can take many forms:
- Time-stamped travel records such as Uber or Lyft receipts showing pickup and drop off locations. Such a log is available through most apps, but you may want to check on how long they are available.
- Follow-up emails or letters referencing a meeting or event.
- A list of individuals who can verify business activity.
- Meeting agendas and notes
- Materials obtained from business locations
- Attendance certificates or certifications
- Vendor promotional materials, preferably with notes or inquiry follow-up.
Key Three – Dollars Spent:
Proving Key One and Key Two are essential for deducting travel as a business expense. If these are not proven, none of your travel expenses get expensed - only direct business costs such as business meals or seminar fees.
Once you establish a business purpose and business days, the next requirement is to prove how you spent the amounts deducted. You must also show that each expense is yours or a fellow business travelers’ and related to travel (not personal or for entertainment). For more information on tracking expenses, please check out our article Easy Recordkeeping for Real Estate Agents. Here’s some advice to help you prove your travel-related expenses.
- Use A Business Mode of Payment: Use your business checking account or credit card to pay for your travel expenses. Paying for items online when possible is also helpful, as many sellers will keep a history of your purchases in case you need them later.
- Pay Your Expenses Separately: If you are traveling with others, such as friends or family, pay only your expenses through your business. If you pay the costs of others, use a personal bank account or credit card. It may be a hassle but will be worth the effort when it’s time to prepare your taxes. It also shows a level of organization and professionalism an IRS officer will appreciate. And, finally, it avoids explaining the non-business expenses of travel companions.
- Avoid Using Cash: Cash is convenient, but it leaves a horrible paper trail. One of the easiest ways to overlook deductions is to pay an expense with cash and lose the receipt. Many receipts are fragile and quickly fade or become illegible. Having the backup of a credit card statement or canceled check provides further evidence of an expense showing the date, amount, and where the money got spent. Often, what was purchased can be easily inferred by the nature of the seller.
- Keep Your Receipts: Yes. Collect and keep your receipts. Try the envelope method discussed in Easy Recordkeeping for Real Estate Agents while on the trip. IRS Publication 463 states that documentary evidence (bills, receipts, or canceled check) is not necessary for any travel expense of less than $75 (other than lodging). Still, keep all your receipts, mainly when the trip includes personal days, non-business travelers, and a vacation destination.
Pub 463 further states that a hotel receipt is enough to support expenses for business travel if it includes: A) The name and location of the hotel, B) The dates you stayed, and C) Lists lodging, meals, and telephone calls separately.
For business meals (meals that involve a substantial business discussion) had while traveling, a restaurant receipt will suffice if it lists A) The name and location of the restaurant, B) The number of people served, C) The date, and D) the amount of the expense.
- Tie Expenses to Schedule: Make sure your travel costs match your calendar or itinerary. You might have a hard time substantiating your trip if receipt dates don’t match the days claimed as business days.
Summary and Invite: This closes our series of articles on deducting domestic travel expenses. We hope they have helped you too better understand deductible travel. Most importantly, we hope they help you plan some tax-saving recreational trips, and confidently substantiate your deductions. If you’d like some assistance in cutting a Real Estate Agent’s highest cost - taxes, please download our Real Estate Agent Tax Organizer. We also invite you to review and purchase our Real Estate Agent Tax-Cut Library - over eight hours of tax-cut training 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! And don’t forget to browse our courses. You might find something you like!