Is My Island Vacation a Tax Deduction?

If you are self-employed, then your business likely takes you away from your home. In some cases, it may take you very far away, say, to a tropical island for a conference built around midday buffets, snorkeling and all-inclusive drinks.

If that is the case, then the IRS wants you to know that you can deduct a portion, or possibly the entire cost of your trip.

Ever wonder why business seminars and training classes are rarely held in cold and remote locations? For that very reason - If the trip is deductible, then you might as well make it enjoyable for all parties attending.

If you plan to deduct a business trip, the IRS suggests you keep the following in mind.

Your Tax Home

By definition, necessary travel away from home occurs when your duties require you to be absent from your main tax home substantially longer than an ordinary day's work and, because of that, you need to secure lodging.

Your tax home may be your home residence, or it may be your general place of business such as your store or office. Your tax home is the location where you conduct your primary business. If you have more than one place of work, you need to consider the total amount of time you spend at each location and the level of business conducted there. Determine which location is primary; travel away from that location is then potentially deductible.

Travel to and from your family residence to your tax home is not deductible.

What Can I Deduct?

The following are the categories where possible travel deductions can be allocated:

• Transportation: You can deduct the full cost to travel by air, plane, bus or car between your tax home and the business destination. If you are traveling on a cruise ship, restrictions apply. If you are using your own car, you can choose to deduct the standard mileage rate or the actual expenses.
• Commuting: If you commute via a taxi, bus or limo you can deduct the costs of travel between the airport and your place of lodging, as well as between the hotel and the work location(s).
• Baggage and shipping: If you paid an extra cost to transport your work-related items, such as samples, projects or display material, you can deduct these costs.
• Lodging and meals: Reasonable costs associated with these can be deducted. Be cautious not to deduct expenses that are for personal entertainment. Meals include amounts spent for food, beverages, taxes and related tips.
• Entertainment: Ordinary and necessary expenses to entertain a client or customer can be deducted if the expense occurred in a clear business setting or the main purpose of the entertainment was to actively conduct business.

Not Traveling Solo?

If your spouse, family member or friend is traveling with you on your business trip, then you generally cannot deduct any costs associated with that person. This may mean you have to apportion and reduce certain costs that were increased because you have added another party to your trip, such as the cost for a larger room with two beds verse a single.

If the person is your employee, and if that person has a bona fide business purpose to be there with you, then you can deduct that person's travel expenses, assuming they are not doing so themselves.

Meals

The IRS does not assign a certain meal dollar limit or budget the amount of money you are allowed to spend on a per diem basis. You are free to choose where to have your meals, be it a fast food drive-thru or an upscale restaurant and nightclub.

If you deduct meals, you can choose to deduct the actual cost, which is subject to a 50 percent limitation, or you can use a Standard Meal Allowance, currently set at $46 per day as of tax year 2010. You are allowed to deduct the full $46, even if you spend less.

Travel Outside the US

If you travel outside the United States, and if you spend the entire time on business activities, then all of your expenses are deductible. The same is true with travel within the US.

Even if you do not spend the entire time on business, if you travel outside the US and meet one of the following exceptions you still can deduct the entire cost of your trip:

1. You did not have substantial control over arranging the trip. Meaning that you are not in an executive position and you were advised that your travel was mandatory.
2. If your travel took you outside the US for less than one week, meaning seven consecutive days.
3. Your travel was for more than one week, but less than 25 percent of your time was spent on non-business activities.

For more information on deducting travel expenses, review IRS Publication 463, Travel, Entertainment, Gift and Car Expenses.

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