By Ryan Ragano | January 27, 2019
What if there was a way to make this happen?
What Qualifies as Business Travel?
There are multiple ways you can deduct your travel expenses. In order for an expense to be deemed a “travel expense”, it must pass several tests.
- The travel needs to be “away from your tax home”, meaning that the travel will take you away from your regular area of business. Your “tax home” may vary dependent on the geographic structure of your business. To qualify as a travel expense, it is assumed that you must stay overnight somewhere other than your own home due to the distance. Let’s assume in our hypothetical scenario, you are staying over for multiple nights.
- Next, the travel must be deemed “ordinary and necessary” to your business. If the trip you are on is something commonly done in the real estate industry for business purposes, you have satisfied this test. However, it also needs to be specifically necessary for your business. If you are a buy and hold rental real estate investor, you will have difficulty deducting expenses relating to wholesaling.
Can I combine vacation and business into one trip?
In order to deduct any of the costs as business related, the majority of the days on the trip must be used for business. This means if you are on a five-day trip, you could do three days of business activity, and two days of vacation. It should also be noted that the days traveling to and from your home qualify as business. A day qualifies as a business day if you put at least four hours of it towards business-related activity.
How do you split the expenses between business and vacation?
So you have satisfied the tests that your trip is away from your tax home, ordinary and necessary for your business, and it is majority business – are 100% of the costs deductible?
The IRS is actually more generous with these rules than you might expect, because you can deduct 100% of the costs of the travel to and from your destination, such as airfare. For all other costs, they must be broken out by the day, so any expenses you incur on a vacation day (hotel, taxi, car rentals, meals) will be considered 100% personal expenses. In the same way, any expenses you incur on a business day can be deducted. Please note that the expenses must be considered ordinary and necessary for your business, even if they occur on a business day.
What is the most practical way to use this method of mixing vacation and business?
There are several different scenarios you can use this method with, but the easiest to pull of is usually going to be travel for educational purposes.
Take note that you must already be an active participant in whatever topic the education is if you hope to deduct it. If you are attending real estate conferences to take notes for the business you hope to launch in a few years, this will not be business travel for you. However, if you are attending conferences or seminars to help you grow or maintain your skills in your already existing business, you are perfectly justified in claiming it as an educational expense, therefore making it an eligible travel deduction.
New Property Purchase
You can also travel in order to examine properties in consideration for purchase, however, this can be a trickier method. In order for expenses to actually be deducted, you need to purchase a property in the location traveled to. Even if the property is purchased, the travel expenses may be added to the basis of the property to be depreciated rather than deducted immediately. Whether or not this can be expensed upfront depends on the amount of expenses already deducted in your initial year prior to operation.
There are different reasons of travel individual to each specific facet of the real estate industry, but as long as it meets the IRS tests, it may be eligible for the business/vacation mixture.
One of the most important steps to protect yourself in the case of an audit is to document everything. Ideally, you can have documented itineraries and schedules for the business portion of the trip, even as much as an explicitly stated business purpose for the trip.
Save any time-stamped documentation as proof of the expense. You may incur legitimate business travel expenses, but you must be able to provide sufficient documentation.