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By Numbers Blog

Is a Vacation a Tax Deduction?

Are Vacations Tax Deductible?

One of the biggest worries when planning a vacation is the enormous amount of expenses that you have to spend hours calculating. And not just that, but the sky-high tax that applies to your vacation-related expenses also hardens the blow on your bank account.

But what if there's a way around this tax-loaded mess? There is. Definitely.

Tax-deductible vacations!

What Are Tax Deductible Vacations?

Well, to explain tax deduction for dummies and professionals alike, here's what we can say: Tax deduction is when an expense can be subtracted from a taxable income when filing tax forms.

This way, the total amount of income you show on your Internal Revenue Services report is lessened. As a result, the total taxable income for the year is reduced, reducing the total tax payable. This is particularly applied to the Adjusted Gross Income that is associated with producing additional income.

Basically, anything that is a source of extra revenue can be tax-deductible. Of course, this means you'll have to do business, plan audits, manage projects, and make profits. But that's not what vacations are for, right? Vacations are meant to help you relax and, well, have fun.

Work isn't your idea of fun.

So how on earth can you turn your family vacation to Thailand into a source of revenue that can then bring down your taxable income? Will you be sipping coconuts while going through your invoice list?

Not quite.

Instead of a vacation, it's a work-cation.

Also known as a business trip.

Sounds exciting, doesn’t it? Well, let's explore how you can turn your work trips into a quick vacation with nearly zero taxable income!

Why Do Business Trips Qualify for Tax Deductible Revenue Sources?

The main reason business trips get a tax deduction is because they help secure additional income for one's business.

That is why the expenses that are incurred during that trip are all counted as tax deductibles. Therefore, the bigger a business trip, the higher the chances are of getting a substantial tax reduction.

Do All Business Trips Have Tax Deductions?

There is no definitive answer for that. Instead, the amount of tax deductibles you are able to secure depends on how your trip takes place.

Some business trips last weeks or even months, but obviously, you do not spend your 24/7 schedule attending meetings and answering emails. You will go on client dinners, shopping sprees, movie nights, etc. So, all the time that you spend on leisure activities will not be counted as tax-deductible.

On the other hand, a business trip that involves almost no such leisure activities is going to be highly tax-deductible. Moreover, these will usually be preplanned, with a jam-packed schedule and of short duration.

Now, if you take a closer look, then you will see that the first case somewhat resembles a vacation in specific times. Thus, you can balance between your work and free time in order to get in your tax deduction, generate an additional income, and enjoy your trip as well.

Who is Capable of Earning a Tax Reduction Through Business Trips and Vacations?

While all employers and employees are eligible for vacation bonuses, they still have to pay for non-tax deductibles in their tax forms, as for business trips. These expenses are covered by the business for carrying out business duties.

Since most such trips are carried out by business owners, higher execs, and self-employed people, they are the only ones who can avail tax exemptions through their business trip vacation expenses.

Different Types of Deductible and Non-Deductible Business Trip Expenses

There is no clear line drawn between deductible and non-deductible expenses, but here are a few rules through which you can distinguish between the two and figure out how much of your vacation can become deductible in terms of taxable income:

Trip Destination

Where are you going on your trip? That obviously means the city or country where you have to handle your business duties.

So, let's suppose you have to attend a few meetings in your company's New York headquarters. Now, NY is a big city, so your travel expenses to and from NY are tax-deductible. Likewise, your transport fares that assist you in business duties are tax-deductible.

But if you take a leisure trip to Central Park, then the expenses attached to that may not be tax-deductible. However, let's say you have a business trip to a place that offers recreational services. That would count as a vacation and a work trip, but it would all come under tax-deductible expenses!

Suppose your prime business destination is an offsite place or someplace where logistics are hard to manage. In that case, you may be accommodated at a hotel which is in a nearby city.

The travels, in this case, will mostly be deductible. But if you take a leisure trip to a place near your business destination, then that may not be tax-deductible.

Business Days vs. Personal Days

During your business trip, the following days count as business days:

  • Your travel days are a part of business days, as well as weekends and holidays that come up during the business trip
  • Standby days count as business days. These are when you have no business commitments scheduled, but you are still required to be there for the business
  • Any other day devoted to managing your business also counts as a business day
  • Your business expenses on all these days are applicable for a tax deduction.

As for personal days, any day that does not fall into these three is counted as a personal day. Expenses for personal days are not deductible.

Business vs. Personal Expenses

Another important distinction is between the various expenditures that the business pays on your behalf and the ones that it does not pay for.

  • Business expenditures include the expenses for fares, lodgings, food, customs, conferences, etc., as well as other out-of-pocket expenses that are linked to the business and may or may not be a part of your business day. These are the ones where you can expect tax deductions
  • Personal expenses can be paid for by the business and are only sometimes deductible. Even then, only those expenses are deductible, which is for yourself as an individual. The money you spend on your family members will not be deductible unless they are also employed by the same company and are there for business purposes

Converting Expenses from Non-Deductible to Deductible

Whether you own a small business or a large one, business trips are expensive, which is why the IRS exempts taxes on the expenses that incur during that time.

Suppose you are concerned about the accounting that it takes to maximize your tax-deductible expenses. In that case, it is best to talk to a Certified Public Accountant. A CPA can help you convert most of your leisure expenses into business ones and get the tax deducted.

Here are some ideas that can help as well:

Have a Prior Set Business Purpose

One major requirement of the IRS is to have your business trip preplanned. This means that you cannot just wander off to your destination and try to arrange a few meetings under the guise of a business expense.

To get the deduction, you must clearly describe the intent to perform business on your trip along with sufficient details regarding the expenses. For example, a pre-announcement along with a few business dealings will qualify as a tax-deductible business trip for the IRS.

Keep Your Records

As per the IRS requirements, 100% of lodging, tips, car rentals, and 50% of your food expenses are all tax-deductible.

To calculate your total tax-deductible amount, you should first keep a record of all your expenses in the form of a journal, if not receipts. You should at least have a listing of all the expenses along with the date, day, amount, and reason for the expense.

The IRS does not require receipts of travel expenses under $75 in total, except for lodgings. So keeping a written account or a spreadsheet account would be sufficient for many business travels.

Adjust Your Business Days

Try to maximize your business days and reduce the number of personal days. Even if there is a small business commitment, that would count as a business day and will be eligible for a tax deduction.

Moreover, try keeping your weekends between business days, and this way, you will be able to deduce most of your expenses for these days, too.

Conclusion

The next time you plan a business trip, remember: work hard but also incorporate some fun. It is best to include leisure moments and relaxing activities in your work trips. However, you would still want to keep your expenses as light as possible.

A tax deduction is another factor that you can work out if you plan it well with the help of a Certified Public Accountant. With this handy guide on tax-deductible vacations, you can turn all your business trips into a leisure getaway!

References

https://corvee.com/blog/are-vacations-tax-deductible/

https://www.allbusiness.com/5-strategies-to-turn-your-vacation-into-a-tax-deduction-2766-1.html#:~:text=The%20IRS%20states%20that%20travel,work%20while%20away%20from%20home

https://www.accountingfreedom.com/are-vacations-tax-deductible/

Final Thoughts from the Hall Accounting Team

If any of the information provided above made you feel confused, don’t stress because you are not alone. There are many other businesses that have faced similar problems in the past. However, with time, they have fared well with just a little help.

If you are struggling or just don't have the time to keep up with it, it may be time to have Hall Accounting take over and invest with accurate accounting records and financial reports. The Hall Accounting team will manage your records from start to finish and make sure all adjustments are timely recorded. This option is also feasible for small businesses because it is cheap and hassle-free, at a fixed monthly rate. If you are interested, please feel free to email us at proposals@hallacctco.com and we will get you a free quote!


IMPORTANT DEADLINES

4/18/22 TAXES WERE DUE!
Deadline to file individual tax returns for 2021
First-quarter estimated tax payments due for 2022
Deadline to contribute to HSA for 2021
Deadline to contribute to IRA for 2021

6/15/2022

Estimated tax payment for 2nd quarter of 2022 (Form 1040-ES)