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:
- A day that requires your business presence, regardless of the amount of time. Although true, the event requiring your participation should be significant and beyond your control. An example may be signing a contract or series of documents that need your physical attendance. A board meeting that requires your attendance or an event where you are giving a formal presentation are other examples.
Note: Spending a couple of hours meeting with clients or having lunch with a prospect would likely fail the smell test without a super-compelling argument to the contrary. An hour browsing a trade show or sitting in a promo booth will probably flop as well.
- Day your presence might be required but is ultimately not needed (these are called Standby Days). These are days that demand your availability in case a particular event occurs. Such scenarios are common in industries where troubleshooting or contingency preparedness are needed, such as complex software installations or the repair/fine-tuning of critical machinery.
- Holidays and weekends between business days. A holiday or weekend occurring between bonafide business days are considered business days. This exception has one crucial caveat: The cost of traveling home must exceed the cost of staying OR repeating the travel is inconvenient (a vague, subjective term). Auditors know holidays and weekends are prime vacation days. When counting them as business days, make sure the business conducted before and after are significant. Also, be prepared to show that the cost of traveling back home and returning exceeds the costs of staying or that such travel made little sense.
- Sandwich Days: Sandwich days are synonymous with weekends and holidays, except they include non-holiday weekdays occurring between bonafide business days. For example, you attend a continuing education conference Monday and Tuesday. You are teaching a similar class on Thursday in the same city. Wednesday is a sandwich day and, therefore, a business day. As with holidays and weekends, it is your responsibility to show that the cost of traveling home and returning exceed the price of staying or such travel would be imprudent.
- Business Days Gone Bad: Days scheduled as business days remain as such when the business event gets canceled or for reasons beyond your control. Business activities in which you are not able to participate due to unforeseen circumstances remain business days as well. For example, you travel to attend a two-day conference, and it gets canceled due to a snowstorm. The two days remain business days, especially if your return flight is on the third day or the weather makes it dangerous to drive home early.
- Note: Any day not followed by a business day before traveling home is a personal day unless an excellent argument exists to the contrary.
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:
- Recreation and Entertainment Alternatives: Expect the level of IRS scrutiny to increase the more your travel destination is considered a vacation hotspot. It’s one thing to spend five days evaluating land in Milton, West Virginia (population 3,000 and the closest lodging is a Best Western nine miles away). It’s quite another to stay five days in a Miami beach-front condo with your spouse and kids when there’s a home-décor, trade show downtown. The Miami trip may still be deductible (at least for your travel-related costs). But, expect an auditor to require more convincing for the Miami trip than visiting a small town whose single gas station doubles as its post office and diner.
- Family and Nonbusiness Travel Companions: As one can easily imagine, bringing friends and family can cause travel to smell less like business and more like pleasure. Be prepared to prove otherwise.
- Hours Spent on Business Activity: Ideally, a business day will resemble a regular workday – the same hours worked, performing the task as you do at home. Such travel is easy to substantiate, especially for an engineer, a nurse, or other professionals who regularly travels to perform a specialized service.
This ideal, however, does reflect the reality of much business-travel. What about business owners attending training, a conference, meetings, or investigating opportunities? Is it necessary to work from 9 am to 5 pm to have a business day? That depends on the activity’s nature, your level of involvement, and its potential impact on business (the facts and circumstances).
- Importance to Business: As mentioned above, a day that requires your presence (such as signing a contract) counts as a business day, as does a standby day. Based on this standard, we can surmise that the amount of time needed to create a business day is inversely related to the business-importance day’s events. In other words, the more crucial your presence or consequential to your business, the less time needed to make the day a business day.
What about the time spent at a conference or obtaining continuing education? Again, consider the facts and circumstances. Attending a conference or tradeshow related to your business will probably require more attendance-time than classes needed to keep a professional license. The inference is subjective and ultimately decided by an auditor. Still, attending a trade show related to your business would probably require substantial attendance-time (say, six or seven hours) to be a business day. In comparison, training needed to keep your license might only require four or five hours, provided that was the length of the class. But, leaving an eight-hour course at noon to hit the beach or go shopping would likely fail the business day test.
- Return on Investment: Another way to increase the business-strength of an activity is the amount of business the event may generate for your business. An hour-long meeting resulting in a twenty-grand contract carries a lot more punch than several hours cold-calling prospects pulled from a google search.
- 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.
- Preparation Required: The amount of time and effort put into the day’s activity can have a significant impact on the business-day determination. For example, you invest ten hours preparing to pitch a presentation to be the exclusive sales agent for a developer. You travel, arrive at the hotel and sleep. The next day you walk into the developer’s conference room, introduce yourself and start your spiel. After ten minutes, the firm’s vice president stops you and says your agency is not a good fit. That day’s a business day – a very depressing business day.
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.