This is a perfect time of year for small business owners to plan their holiday travels properly so they can potentially generate a tax deduction. Valid travel expenses can be a fantastic deduction on a small business owner’s tax return. Unlike meals and entertainment, which are limited by 50%, travel expenses are 100% deductible as long as they are wholly business-related.
If these expenses are wholly relevant to your business, deductible travel expenses include airfare, hotel, rental cars, valet, taxi, trains and tolls, just to name a few. You would be shocked to know how many new clients’ tax returns come across my desk every year with literally zero travel deductions.
If your business requires you to travel, you could be missing deductions that can shrink your taxable income and grow your bottom line.
An Important Note About Mixing Business With Personal Travel
Before we go on, it’s important to note that your travel expenses must be business-related in order to be 100% deductible. If any part of your trip is for personal reasons, such as taking a detour to visit your brother in the suburbs or staying with your old college roommate to save on expenses, those personal expenses are not deductible.
So, if you rent a car, and you use 10% of your driving time for personal travel, you can only deduct 90% of the cost.
In fact, here’s an example taken straight from IRS Publication 463:
“You work in Atlanta and take a business trip to New Orleans in May. Your business travel totals 850 miles round trip. On your way, you stop in Mobile to visit your parents. You spend $2,165 for the 9 days you are away from home for travel, meals, lodging, and other travel expenses. If you had not stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $1,860. You can deduct $1,860 for your trip, including the cost of round-trip transportation to and from New Orleans.”
You can go ahead and visit your parents, but be aware that you can’t deduct that portion of your trip. That being said, in line with the above example, being able to deduct 85% of a trip is a lot better than not being able to deduct anything at all. As with any deduction, make sure you have detailed notes that back up your claims.
Now that that’s out of the way, here are five ideas that you might be able to coordinate with or plan “in and around” your holiday travel to maximize your tax deductions.
1. Your Company’s Annual Meeting
If you have a corporation, your annual meeting would include your board of directors and possibly your shareholders. If you have a limited liability company (LLC), your meeting might include a board of advisors or other members (owners) of a multi-member LLC. An annual meeting is an excellent opportunity to discuss the operations of the company over the past year.
Use the occasion to address profits, losses, acquisitions, new ventures, short- and long-term goals, and get input from all meeting participants to make plans for the next year. Being an entrepreneur can sometimes feel like a lonely experience, but seeking the input of other board members and/or advisors can help you accomplish and lot more and give you the encouragement you may be lacking.
2. Visiting a Client
Is there a customer or client in the area that you’re traveling to? Could you cultivate a new relationship or strengthen a current one? Schedule meetings each day you are traveling, at least for a few hours, and keep notes of what you accomplish and why the meeting was important. Try to build customers and contacts in the places you regularly visit. Not only will these business trips boost sales, but they’re also deductible.
3. Visiting a Vendor
Is there a vendor, supplier, subcontractor or affiliate you could meet with where grandma or grandpa lives? Could you negotiate new pricing, tour a facility, talk about networking and how you could work more closely together?
When you consider the amount of business you could generate with a strategic meeting, the tax write-off might be just the start of something bigger. Just remember that any activity, meals or lodging that involves grandma and grandpa won’t be deductible.
4. Attend a Conference or Workshop
Look at possible workshops in the local area where you are visiting. Consider classes and seminars on tax, law, business, marketing, website building, SEO, customer relationship management or technical training based on your type of business. If it’s relevant to your trade, it’s tax-deductible.
5. Moderation Is Key
Make sure that you are doing business each day, and keep records of what you are doing, who you are meeting with and how it relates to your business. As usual, the more money you make in your business, the more opportunities you may have to be aggressive and take a larger deduction. The larger deduction, however, can make you a larger target for an audit.
So, with that in mind, don’t get greedy. Remember the old adage, “pigs get fat and hogs get slaughtered.” This means that while hard work pays off and keeps you comfortable, excessive greed can get you killed. Be like the pig. Keep your receipts and records handy with a program like QuickBooks, and discuss the expenses with your CPA at the end of the year in order to report a well-balanced tax return.