Mix Business, Pleasure for Vacation Tax Break

It’s summer vacation time. But don’t leave home without first exploring whether you can write off at least part of your expenses.

Getting tax breaks from vacations is harder to pull off these days, but it still can be done with the right planning.

The Tax Reform Act of 1986 tightened rules on travel expense deductions. For example, you can no longer write off expenses of attending investment seminars unless they are an ordinary and necessary part of your trade or business.

But there are still several legitimate ways to combine business with pleasure and get at least a partial tax break. Combine a short vacation with a business convention, or include business activities on your trip. If you are more adventurous, consider a tax-deductible scientific expedition.

“A lot of people look for the whole year to get their vacations tax-deductible,” says Sidney Kess, partner at the accounting firm of Peat Marwick Main & Co. “They can’t afford going any other way.”

The key to deducting travel expenses is finding legitimate business or job-related activities on your trip. Purely personal travel is not tax-deductible.

You also must be able to document your business activities if you are audited. Be prepared to show that clients you visit are legitimate. Keep copies of convention or seminar programs and agendas. Or keep a little diary of sessions you attended. And back up your expenses with receipts, bills and canceled checks.

Also, be aware that the deductibility of travel expenses is subject to different rules depending on whether you are self-employed or not. If the travel is related to your self-employed work, then your costs can be treated as a business expense on Schedule C of your income tax form.

But if you are an employee and your costs are not reimbursed by your company, it is much tougher now. Under tax reform, unreimbursed expenses are considered miscellaneous expenses that together must exceed 2% of your adjusted gross income to be deductible. And if you don’t itemize, you’re also out of luck.

“Adding the 2% rule makes it doubly difficult” for employees to deduct travel expenses, says Harvey A. Bookstein, managing partner at the Los Angeles accounting firm of Roth, Bookstein & Zaslow.

Here are several suggestions:

- Tack on vacations to business-related activities. As long as your trip is in the United States and “primarily” for business, you can deduct all of the transportation costs. Thus, if your business starts or ends on a Friday or Monday, stay over the weekend, Kess suggests. That way you also can save on the airline fare, because most carriers offer reduced rates for passengers with Saturday night stays.

However, lodging, meal and entertainment expenses are deductible only to the extent that they are related to time spent on business. (And under tax reform, only 80% of those meal and entertainment costs are deductible.)

What if you take your spouse and kids along? Unfortunately, you cannot deduct separate expenses for them, unless they are there to serve legitimate business purposes. But if you all share the same hotel room, or travel in the same car, you can deduct the expenses that you would have incurred yourself anyway.

- Be more careful if trips are outside the United States. Tougher rules apply.

For foreign trips in which you can show that business was the primary reason, length of stay is a major determinant. If the trip is a week or less, you can deduct all of the transportation costs, Kess says.

If it’s more than a week, then you must spend less than 25% of the time on vacation or personal reasons to deduct all transportation costs. Failing that test, you can deduct your transportation costs according to the proportion of time on the whole trip spent on business.

However, if the foreign trip is for a convention, seminar or related event, and it is outside North America, you must pass two additional tests, says Shirley Nakagawa of the Internal Revenue Service. In those cases, you must show that it’s reasonable for that activity to be held overseas instead of within North America and that it’s directly related to the active conduct of your trade or business. Once you meet those tests, you can take deductions based on the same rules that apply for other foreign trips.

- Look for business activities on your vacation. If your trip is primarily for vacation, you can’t deduct the round-trip transportation. But if you conduct incidental business on that trip, such as meeting with a customer or client, you still might be able to deduct at least “local” transportation expenses--say, from your hotel to the meeting site--as well as lodging, meals and entertainment directly related to that business.

However, travel alone as a form of education is no longer deductible. Thus, if you are a history teacher, merely traveling to New England to see Revolutionary War sites no longer qualifies. But the specific costs associated with attending a class on the history of the war, or visiting a museum devoted to that subject, might qualify as an educational expense (subject to the 2% floor) if you can show that it improves your skills as a teacher.

- Consider scientific expeditions. Legitimate biologists, archeologists and other research scientists sometimes need volunteers to help them on expeditions to anywhere from Mexico to Hawaii to New Guinea. Volunteers’ expenses may be deductible to the extent the trip contains no “significant” element of personal pleasure, recreation or vacation.

An advantage of this approach: Your expenses can be deducted as a charitable contribution, and thus fully deductible if you itemize, instead of subject to the 2% floor for miscellaneous expenses.

- Whenever possible, get your employer to pick up your expenses. That’s much better than fishing for deductions.

- For further information on travel expense deductions, call the IRS at (800) 424-FORM and ask for its Publication No. 463, “Travel, Entertainment and Gift Expenses.”