Line is blurry on what you can deduct from taxes when vacation and work overlap
By Karen Hube,
Ah, vacation. Beach, glistening ocean, warm sun. Breezy novels and idle walks. Then, a cellphone call from the office. Another. A flurry of e-mail exchanges and urgent texts.
It’s a modern reality: There’s no leaving work behind. Tiny screens and cellphones, sadly, have made manic up-to-the-minute communications with the office an imperative of family vacation.
But here’s the silver lining: The federal government — unlike your spouse and kids — may be willing to cut you a break for the hard work you carve out of your precious vacation days.
The time spent clicking out messages on your BlackBerry, reading reports online and participating in conference calls may make you eligible for deducting a portion of your travel expenses from your taxes.
But exactly which, and how much, of your travel expenses are deductible isn’t always clear. So it will require good judgment on your part and a strong argument to make in case the IRS decides to review your deductions. Lately, the guidelines have become even more blurred, because the law doesn’t address the modern-day intrusion of PDAs, cellphones and laptops on vacation time.
“These IRS rules are old,” says Stephen Kirkland, an accountant at Kirkland, Watson, Thomas & Dyches. Some of the wording in the law (“Where a taxpayer’s wife accompanies him on a business trip . . . ”) brings to mind Tupperware parties and the bouffant. “The lack of clear guidelines leave people having to make some difficult calls,” he says.
When a trip is purely for business, the rules are black and white. Airfare, hotel charges, rental cars and incidental business expenses that aren’t reimbursed by an employer are 100 percent tax deductible. Up to 50 percent of the cost of meals is deductible. If you bring your spouse or anyone else, only your expenses are deductible.
If you take a business trip and tack on vacation days, the airfare and the business portion of the trip is deductible as long as the trip is primarily for business and within the United States. If the business trip is international, the airfare generally has to be prorated based on number of business days relative to total days away. For example, if you spent four of six days on business, 66 percent of the airfare would be deductible.
But here’s where technology makes this formula less cut-and-dried. “If you’re a manager or executive, there’s no such thing as being off the clock these days unless you’re scuba diving on the Great Barrier Reef,” Kirkland says. For example, say you go to London for a four-day business trip and add a vacation day to see Stonehenge. If you spend much of your time tapping out messages and taking calls before and after the tour of the prehistoric stone structure, a good argument can be made that because you conducted business on what was supposed to be the vacation portion of your trip, you can fully deduct the cost of your travel.
When your trip’s primary purpose is vacation but it becomes intertwined with work, figuring out what and how much you can deduct requires good judgment.
The tax law states that when a trip is primarily for vacation, you cannot deduct airfare or other costs of getting to or from your destination, but you can deduct business-related expenses once you are there.
When a vacation is laced with continual cellphone and e-mail correspondence, “you may consider a percentage of the expenses as business based on the ratio of hours worked to a standard eight-hour work day,” says Lisa Osofsky, a partner at the accounting firm WeiserMazars. The hotel stay and meals would be deductible proportionate to your work time vs. your personal time.
Consider a real estate developer who flies with her family of four to Newport, R.I., for a week-long beach vacation. Airfare costs $400 apiece for a total $1,600. The beach house rental runs $3,000, and food and entertainment amount to $2,000. Once there, the developer ends up spending two hours a day on the phone or computer tending to important business back home — that’s 25 percent of a standard work day. When she does her taxes in April, she would be able to deduct 25 percent of the cost of her proportionate use of the rental and the food. Assuming the rental and food costs are divided among four people, her portion of the expenses would be $1,250. Her deduction, 25 percent of that, would be $312 and change.
In the extreme case, in which a crisis erupts in your business and requires your attention for the equivalent of a full work day, you can make a strong argument that your vacation turned into a business trip, and the only difference between being home vs. away was that there was sand at your feet rather than buffed shoe leather. In this case, you would take full deductions for your airfare, hotel stay and meals. Your family’s expenses would not be deductible, however.
For the real estate developer, this could mean being able to take a full deduction for not just the cost of the rental and food, but airfare as well. The total amount of the deduction: $1,640.
The law does not explicitly state that this is permissible, but it doesn’t exclude the possibility of taking these deductions, either. “Most people think when you get into the tax world things are black and white,” Kirkland says. “But it’s not. There are so many situations where you have to use judgments. Ultimately, you have to decide what you’re comfortable with — you have to sign the return.”
Whatever your combination of vacation and work, accountants stress the need for keeping documentation and a travel log. The more detail the better. Maintain cellphone records and e-mail, with descriptions in a travel log of the nature of the business. If you have a meal with a business prospect, a credit-card statement alone isn’t sufficient. You need the restaurant receipt as well as a personal record of your dinner guest and the nature of the business.
“Even with lots of regulations, rulings and court cases, the complex world creates situations not specifically addressed in the law. In these situations, we tell our clients that there is no specific guidance or bright-line test and that we recommend looking to the spirit of the law and consider what would be equitable,” Kirkland says.
Can the IRS disagree? Of course. But if you spent your vacation taking cellphone calls while your kids were surfing, in the absence of clear IRS guidelines you have to draw your own line in the sand.
Hube is a columnist for The Fiscal Times, an independent news organization that provides original reporting and analysis on fiscal and economic matters.