With business travel picking up again and summer approaching, many business owners may be mulling trips that combine vacation with work or other personal activities. Here’s a refresher on the IRS rules related to deducting personal vs. business travel costs that can help you reduce your tax bill.

General Requirements

Business expenses must be “necessary and ordinary” to be deductible for federal income tax purposes. With business travel, you can deduct the necessary and ordinary expenses of traveling away from your home for business for one day or more.

“Home” refers to the general area or city in which you work, regardless of where you live. If you have more than one office for your business, your tax “home” is your primary place of business.

Domestic Travel

When traveling within the United States, you can generally deduct 100% of your travel expenses to get to and from the destination (for example, plane tickets and cab fares) if the trip is mostly for business. Whether travel is primarily for business changes based on how much time you spend on business vs. leisure. For example, if you travel for 10 days and spend seven of the days visiting clients and three of them sightseeing, the trip is primarily for business.

If you spend more of the trip on leisure than business, you can not deduct any of your travel expenses during the travel to and from your destination. You can, however, deduct expenses you incur while on your trip that would qualify as business expenses.

When your trip is primarily for business, you can deduct the cost of your lodging, and under temporary rules, you can possibly deduct 100% of meal costs for the following tax year. (Please note, this deduction is scheduled to revert to 50% of meal costs in 2023.) You may also deduct other qualified business expenses incurred on the days you spend on the business. But you generally can’t deduct expenses incurred by a companion unless that person is an employee.

So, if you are traveling with your spouse and pay more for double occupancy lodging than you would have to pay for single, you can only deduct the single rate. You can, however, deduct 100% of a car rental because the cost would be the same if you were alone.

Saturday Night Rule

You will want to keep in mind the special rule regarding Saturday night stayovers, which often can result in lower airfare. The rule applies when staying over will reduce the cost of the trip overall.

In detail, the sum of the airfare with a Saturday night stay and the additional lodging and meal expenses must be less than the lowest available airfare without a Saturday night stay at the time of booking. Under these circumstances, you can deduct your meals (subject to the applicable limit), lodging, and other business-related expenses for the added time.

Foreign Travel

For foreign travel, you will need to allocate your travel expenses daily between personal and business days, deducting only the portion allocable to business days. Business days include:

  • Transportation days,
  • Days your presence is required (even if you spend most of the day on personal activities),
  • Days you spend on business, and
  • Weekends and holidays that fall between business days.

The IRS recognizes four exceptions to this general rule. You do not have to allocate any of your travel expenses to and from a foreign destination if:

  1. You are out of the country for seven consecutive days or less (counting the day you return to the country but not including the day you leave). For instance, if you travel to London for a four-day meeting and spend two extra days on personal activities, that is considered seven days out of the country.
  2. You are out of the country for more than one week but spend less than 25% of that time on personal activities (counting both the day you leave and the day you return). For instance, you fly to Japan and spend 14 days on business and five on personal activities, with one day traveling each way. That is a total of 21 days, but you have spent less than 25% (5/21) of the time on personal activities.
  3. You do not have substantial control over your travel arrangements. This exception generally doesn’t apply to business owners, executives, or the self-employed.
  4. Vacation is not a major consideration for the trip.

In each of these cases, your travel is considered “entirely for business,” and you can deduct 100% of your travel expenses to and from the destination, plus your meal and lodging expenses (subject to the applicable limit) for the business days.

Additional rules apply for foreign conventions. For example, you must show that it is reasonable to hold the convention outside of the North American area as in it. The tax code defines “North America” broadly — for example, including the Bahamas and Costa Rica — for this purpose.

Build a Record

The rules for deducting business travel can be complicated, but the tax savings can be significant for you. Contact us with any questions about which costs are deductible and how to ensure you have proper documentation.