Transcription
Have you ever thought, "I want to go to Bora Bora and write it off as a business expense?" Well, so have a ton of social media influencers because they are recommending it every other video. But what does the actual tax law say? Today, I'm walking you through exactly what you need to do to deduct your travel on your business and what you need to avoid.
I'm Jasmine Duchi. I'm a tax attorney, CPA, and enrolled agent. I started studying tax law in high school. My day-to-day is actually running my CPA firm and my tax law firm. But I started posting on social media and created a free tax law community after a decade of practicing tax because real tax help with actual tax law should be available to everyone.
Step one, you must have a real business. And this step might sound obvious, but based on the questions I get asked, I know that it needs to be addressed. Okay? Having an LLC does not mean you have a business. And for tax purposes, you only have a business if the activity is considerable, continuous, and regular with the primary purpose of earning a profit. And your intention of earning a profit is not based on what you say, but based on what you do. It is a facts and circumstances test looking at the factors that include how much research did you do before entering into business? How much experience do you have in this area of business? How much time are you spending on the activity? How do you react to losses? Do you make changes to create a profit or quit the activity if you're not making a profit, which honestly is what a business owner would do if they entered into an activity for profit and can't make a profit? Or do you just continue with losses without any changes or likely prospect a future income? Are there other income sources or assets that you can rely on without needing to turn a profit in this activity? And are there personal motivations to keep this activity around without a profit? And while I could go into more detail here, if you're asking whether you have a business after listening to those questions, you probably don't have one yet. And if you do not have a business under the tax law, then you do not have a deductible business travel.
But if you do have a business, then we want to go to step two. The expense must be ordinary, necessary, and primarily for business purposes. Under IRC 162A, your travel has to be both ordinary, necessary for your business, and it should be primarily for business purposes. And in order to determine whether a trip is primarily for business purposes, the Treasury regulations emphasize that the time spent on personal versus business is a very important factor. Does this sound simple? Well, it's certainly not as simple as influencers online make it sound. Ordinary means it's common in your industry. Necessary means it is appropriate and helpful. These interpretations are broadly defined by the courts and are relatively straightforward. But what does primarily for business purposes mean? Does it mean that you can take a week-long family vacation and slap on a board meeting and deduct the travel? Does it mean that you can go to your friend's wedding for a weekend, but do a little content while you're out there and deduct the travel? It's going to be a no. Okay? But it is not up to our common sense interpretation. Instead, it is based on how the courts interpret the statute and regulations. And when we look at court cases, they primarily care about first, the amount of time spent on business versus personal. Second, the significance of the business activity. Okay, specifically how closely the work is tied to the business, right? Is it just general education in your area of expertise that could have also been attained in a different, likely less glamorous and closer location, or is it more directly related to your core business activity or revenue? And third, the significance of other personal activities on the trip. Were you just near family or did you visit many different exotic sightseeing locations? And we see these factors weighed in Habib versus Commissioner, where the taxpayer delivered two weeks of lectures at the University of Cairo. And the court said the taxpayer devoted substantial time and effort in preparation. And the taxpayer is well-respected for his specialized learnings, his writings, and his lectures. And that his lectures helped to maintain his reputation. Despite there being additional personal time spent with family in Egypt, the court still found the business purpose significant enough to make it primarily business purpose. Compare that to both Clark versus Commissioner and Holles versus Commissioner, where the court found the trips were both primarily personal. Okay? Both of these taxpayers spent 14 to 28 hours in continuing education related to their businesses, and Holles's trips were even sponsored by the American Medical Association. But the court notes that the education itself wasn't closely enough related to the business, and both taxpayers did a significant amount of sightseeing as a part of their trips that was equal to or greater than the amount of time spent on business. At the end of the day, the courts are looking to intent. Okay, they are weighing the amount of personal and business activity, as well as the significance and substance of the personal and business activity.
Step three, airtight documentation. Okay, business travel is one of those special items that has extra documentation requirements because Congress thought it was more likely to be abused. Okay, so under IRC 274D, in addition to having the receipt and proof of purchase, you must document first, the amount spent, the place of travel, business purpose of the travel, and business relationship of the people involved. You need this at or near the time of travel, not to reconstruct it later when audited, so that the records are seen as credible. This is by far the most common reason the IRS and tax court deny travel deductions. IRC 274D also prohibits the use of the Cohen rule, which is a more generous rule that sometimes can allow for estimating expenses. So, if your records are incomplete, the entire deduction can be disallowed, even if the travel was legitimate.
Step four, companion travel with family members is even stricter. Okay, so finally, we are going to talk about flying out your spouse or your kids. And it's under IRC 274M3. And it tells us that even if you meet all of the other requirements above, that travel for a spouse or dependent is only deductible if they're an employee of the business, which means W2, okay, their travel serves a bonafide business purpose, meaning real work on the trip that's necessary for that location, not just general socializing or networking, and the travel would have been deductible if they had incurred the expense on their own. So all those videos out there telling you to just put your family on your board of directors are just ideas from someone who hasn't read the tax law. A board position is not a W2 position, and we have clear statute telling us that you need more than that to deduct your family for business travel.
And step five, international travel rules are even stricter. Okay, you still have to meet all the requirements we've already covered: a real business, primarily business purpose, airtight documentation, and proper handling of family travel, plus two more requirements for international travel. The first international travel restriction is IRC 274C, which requires you to allocate the cost of transportation between business and personal days, even if the trip is primarily for business, unless you meet a narrow exception, such as the trip being 7 days or fewer, or less than 25% of the time being for personal purposes. The second international travel restriction is IRC 274H, which requires you to demonstrate that the foreign location was necessary to achieve the business purpose. Meaning, the same benefit could not have reasonably been obtained within the United States or North America. So if you fly to Bora Bora for a meeting with people who all live in the US, and the event could have been just as productively held in your home state, your deduction would likely fail under this rule.
So, I know that was a lot, okay, but travel is a critical topic and is completely misconstrued online. So, here are the final takeaways to deduct business travel. Okay, you must have a real business. The trip must be primarily for business purposes, based especially on the amount of time spent on business versus personal activities. You have stricter documentation requirements that need to be met. Family members can have deductible travel only if they're an employee doing bonafide work related to the trip itself. And international trips should require the abroad location rather than being as reasonable to hold in North America. And if you want more real tax law, not social media fiction, let me know by subscribing. That is how I know that you want more actual tax strategy from a tax attorney.