July 8, 2011
Before George McCutchen, a sales associate at commercial real-estate firm Grubb & Ellis, headed off for a week’s vacation at an ocean-front condo in Litchfield Beach, S.C., he made a key vacation purchase: an iPhone. “I wanted to be able to open documents and see leases and contracts,” he said, adding that he spent about two hours each morning of his week off dealing with business via email and cell phone.
Ah, vacation time. Beach, glistening ocean, warm sun. Breezy novels and idle walks. A cell phone call from the office. Then, another. Tiny screens sadly have made manic up-to-the-minute communications with the office an integral part of the modern day family vacation. But here’s the silver lining: The IRS – unlike your spouse and kids – may be willing to cut you a break for the hard work you carve out of your precious vacation days.
The time spent reading messages on your BlackBerry, reviewing reports online and participating in conference calls may make you eligible for deducting a portion of your travel expenses from your taxes. But exactly which, and how much of your travel expenses, are deductible isn’t always clear. So it will require good judgment and solid electronic evidence in case the IRS decides to review your deductions.
Lately the guidelines have become blurred, because the law doesn’t address the intrusion of smart phones, tablets and laptops on vacation time. “These IRS rules are old,” says Stephen Kirkland, an accountant at Kirkland, Watson, Thomas & Dyches. Some of the wording in the law (“Where a taxpayer’s wife accompanies him on a business trip…”) brings to mind Tupperware parties and the bouffant. “The lack of clear guidelines leave people having to make some difficult calls,” Kirkland says.
When a trip is purely for business, the rules are refreshingly black and white: Air fare, hotel charges, rental cars and incidental business expenses that aren’t reimbursed by an employer are 100 percent tax deductible. Up to 50 percent of the cost of meals is deductible. If you take a business trip and tack on vacation days, the air fare and the business portion of the trip is deductible as long as the trip is primarily for business and is within the U.S. If the business trip is international, the air fare generally has to be prorated based on number of business days relative to total days away. For example, if you spent four out of six days on business, 66 percent of the air fare would be deductible.
But here’s where technology makes the formula fuzzy. “If you’re a manager or executive, there’s no such thing as being off the clock these days unless you’re scuba diving on the Great Barrier Reef,” Kirkland says. Say you go to London for a four-day business trip and add a vacation day to see Stonehenge. If you spend much of your time at the prehistoric stone structure tapping out messages and taking calls, a good argument can be made that you can fully deduct the cost of your travel.
When your trip’s primary purpose is vacation, but it becomes intertwined with work, figuring out what and how much you can deduct is especially tricky. McCutchen, who is an independent contractor with Grubb & Ellis, doesn’t expect to be reimbursed for any work-related expenses. He figured total costs for the condo rental, food, and gas would come to about $3,500 for the week, and plans on deducting a chunk of it to reflect his working hours.
The tax law states that when a trip is primarily for vacation, you cannot deduct air fare or other costs of getting to or from your destination, but you can deduct business-related expenses once you are there. When a vacation is laced with continual cell phone and email correspondence, you may consider a percentage of the expenses as business based on the ratio of hours worked to total awake hours, says Lisa Osofsky, a partner at the accounting firm WeiserMazars. The hotel stay and meals would be deductible proportionate to your work time versus your personal time.
Or, you may count the hours worked as a proportion of the standard eight-hour work day, Kirkland says. “There is definitely an argument for this. It depends on how aggressive a stance you want to make.” Sometimes, it can depend on the quality of work that you've done: If you closed a major deal in just a couple of hours, that may be representative of a day’s work, he says.
Consider a real estate developer who flies with her family of four to Newport, R.I., for a week-long beach vacation. Air fare costs $400 apiece for a total $1,600. The beach house rental runs $3,000, and food and entertainment amounts to $2,000. Once there, the developer ends up spending two hours a day on the phone or computer tending to important business back home – that’s 25 percent of a standard work day. When she goes to do her taxes in April, she may be able to deduct 25 percent of the cost of her proportionate use of the rental and the food. Assuming the rental and food costs are divided among four people, her portion of the expenses would be $1,250. Her deduction, 25 percent of that, would be $312 and change.
In the extreme case, in which a crises erupts in your business and requires your attention for the equivalent of a full work day, you can make a strong argument that your vacation turned into a business trip, and the only difference between being home vs. away was that there was sand at your feet rather than buffed shoe leather. In this case, you would take a full deduction for your air fare, hotel stay and meals. Your family’s expenses would not be deductible, however.
For the real estate developer, this could mean being able to take a full deduction for not just the cost of the rental and food, but air fare, as well. The total amount of the deduction: $1,640.
The law does not explicitly state that this is permissible, but it doesn’t exclude the possibility of taking these deductions, either. “Most people think when you get into the tax world things are black and white,” Kirkland says. “But it’s not. There are so many situations where you have to use judgments. Ultimately you have to decide what you’re comfortable with. You have to sign the return.”
The deal-breaker for claiming deductions is if you have been reimbursed for them already by your employer or a company you are doing contract work for. You may take a five-day vacation and work for one of those full days. In good faith, your company may only count that as a four-day vacation. If it also covers all of your costs for that full day, you can’t deduct them. If you’re left paying the tab for that day’s hotel stay and meals, you have a good argument to deduct them.
If you vacation at home and work a full day, most employers would not count that as a vacation day. Even if they do, it may be a departure from good judgment to try to deduct meals for that day or one-365th of your annual mortgage payments.
Whatever your combination of vacation and work, accountants stress the need for documentation and a travel log. The more detail the better. Maintain cell phone records and emails, with descriptions of the nature of the business. If you have a meal with a business prospect, a credit-card statement alone isn’t sufficient. You need the restaurant receipt, as well as a personal record of your dinner guest and the nature of the business.
“Even with lots of regulations, rulings and court cases, the complex world creates situations not specifically addressed in the law. In these situations, we tell our clients that there is no specific guidance or bright-line test, and that we recommend looking to the spirit of the law and consider what would be equitable,” Kirkland says.
Can the IRS disagree? Of course. But if you spent your vacation taking cell phone calls while your kids were surfing, in the absence of clear IRS guidelines you have to draw your own line in the sand.
More tax coverage fromThe Fiscal Times:
The Tax Law That Can Make Your Kids Super Rich
Longtime Tax Breaks May Get Booted by the Budget
Charities: Cut the Deduction, Pay a Big Price