As an entrepreneur or small business owner, you may be able to legally write off all or part of your family vacations. Virtually any expense can be deductible if it qualifies as a business expense, including travel. To make it easy for you, here are five guidelines for deducting your summer trips with loved ones.
1. Pass the 'three tests' rule.
The general rule is that a travel expense is deductible if you can document that it passes these three tests. The expense must have a business purpose, be ordinary and be necessary. Ordinary means the travel is typical in your line of work. Necessary means that the travel will benefit your business either through increased opportunities or increased profitability.
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2. Work more than 50 percent of weekdays.
To make travel expenses deductible, the business owner must spend more than 50% of each workday on business. You can schedule client meetings, meet with prospects, hold shareholder meetings or look at potential investments. Assuming the trip is inside the U.S, the entire trip is deductible if you meet the Three Tests Rule plus work 4 ½ hours or more per weekday on business. If you are traveling internationally, the deduction is proportionate to the amount of time you spend on business.
3. Make your weekends free and deductible.
There are easy ways to make a weekend trip entirely deductible that many entrepreneurs don’t realize. For example, if you arrive on Friday, schedule a business meeting that day, and then schedule another business meeting on Monday before leaving. As long as you focus more than half of your time on business during the weekdays and you meet the three tests, you can take the weekend off and make the whole trip deductible for you.
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4. Book your hotel as an ordinary expense.
A hotel room can be considered an “ordinary expense” if it matches the typical amount and frequency for the industry. If it is typical for you as the business owner to have a large room when traveling, the entire family can share the same size room and it is deductible. Another option is to request two queen size beds versus a king for the family in one room because your average hotel expense will be about the same.
5. Deduct expenses of family members.
For travel and meals to be deductible for spouses and children, they must also be actively involved in the business and there must be a business purpose for them coming along. For example, if a spouse or child is in sales (versus, say, bookkeeping), then there could be a business reason to deduct their travel and meals while meeting with prospective clients on the trip.
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In addition to these travel deduction tips for entrepreneurs, always pack an envelope to store your receipts in one place. While many think credit card receipts are all you need, the IRS requires actual receipts. When you get home, give the envelope to your accountant to record them in your records. Remember that if you only pretend to document your expenses, you only get a pretend deduction. And for more tips on how to legally deduct almost any expense, check out my book, Tax-Free Wealth.
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