There is a lot of confusion about how business trips and vacations coincide. Is everything deductible? Is anything? Here's the truth in typical tax-speak…. It depends.
For self-employed business owners, travel expenses are deductible on either a Schedule C or a business tax return. Meals as part of travel expenses are only 50% deductible per tax law.
For employees, travel expenses for business purposes and paid personally can be reimbursed tax-free by their employer and are not subject to FICA or income tax withholding.
Part of a vacation may be deductible if it piggybacks on a business trip. Rule 1 is that the trip must be taken primarily for business. How do you determine if the trip is primarily for business? Unfortunately, or fortunately (depending on how you look at it) there is no concrete rule on determining if a trip is primarily for business. We must review the facts and circumstances around the trip to make that determination. However one important indicator is the split of time between business and personal pursuits.
Example: If Gus, a pharmaceutical sales person, flies from San Francisco to New York for a five day conference and spends an additional two days in New York to go to a play and see the sights, the portion of his trip spent at the conference may be reimbursed from his employer tax-free and the expenses are deductible by his employer.
If Gus used a company card to pay for this entire trip, then the expenses he incurred for the personal portion of the trip must be treated as compensation income.
If Gus is a sole proprietor then his travel expenses while at the conference would be deductible on his Schedule C or other business tax return.
A simple way to determine what is deductible is to determine what the trip would have cost if it had only been taken for business. In our example, 100% of Gus's airfare as well as the lodging, transportation, and meals while at the conference would be deductible as business expenses. Only the cost of lodging, transportation, and meals during the two personal days would be nondeductible. The tax savings here is that because Gus was required to fly round trip for the conference, part of his vacation was tax free.
Another consideration of going on vacation in conjunction with a business trip is that the vacation part of the trip is not required to occur at the business destination but may occur en route or on the way home. To compute the deductible part of the trip you calculate the cost of the trip without the personal portion. For example, Juliet drives from San Francisco to Santa Barbara for a business meeting and stops at Disneyland on the way home. The total cost of the trip was $700. If she had not stopped at Disneyland, the trip would have cost $500 therefore the deductible portion of the trip is $500. If Juliet brings her boyfriend Shawn on the trip with her she may still deduct the cost of the hotel (business portion only), and rental car because she would have incurred those expenses even if she had been traveling alone. Only her meals during the business portion would be deductible.
Are personal days deductible under any circumstances?
There are certain instances where personal days are considered deductible. If a weekend is sandwiched between business meetings, such as when you are required to attend meetings on a Friday and again on a Monday, then the expenses you incur on the days off such as meals and lodging will still be considered deductible even though you could be spending Saturday and Sunday on the beach. Another time a personal day could still be deductible is when a business purpose ends on a Friday morning but it's cheaper to fly out on a Saturday. If the expenses incurred to stay an extra day are less than the savings on the flight then the extra day's expenses can still be deductible. In both of these circumstances you must use a good measure of common sense to take the deduction.
It's a good idea to consult your tax advisor if you have any questions when considering taking a vacation in conjunction with your business trip. It is also very important to keep good records and to save your receipts to corroborate your deduction.
Note: this guidance is for domestic travel & excludes specialized rules for those in the transportation industry.