This topic is going to be knee deep in “Talk to your CPA” territory, so please do that before trying to claim your personal trips as business expenses.
Full-time jobs have come and gone in my professional life, but the true constant in my career has always been that of an entrepreneur.
There are perks aplenty for business owners – my favorite is being able to save money by legitimately turning my vacations into business expenses to lower my tax bill.
Every dollar saved is another dollar to keep this traveling homeschooler on the road, and if you are serious about the travel hacking game, you should consider doing this too (after talking with your CPA!).
Sidenote: In the last decade or so, I’ve always owned at least one business with an Employer Identification Number (EIN), even when I had a “real job”. For those of you new to this topic, an EIN is a tax identifier for a business entity. Think of it as an SSN for organizations.
Sure, you can run a business as a sole proprietor without an EIN, but with one, it’s easier to get the biggest tax savings for expenses such as:
- internet access
- dine-out drinks and meals
- home office
- automobile costs.
And of course, my favorite perk: making my family trips a valid business expense.
Lowering your tax bill by turning your travel into a deductible expense
In my book, the biggest benefit of having a business is that you can potentially deduct a significant amount of your travel costs as a legitimate business expense. This can help you lower your taxable income, as long as you follow the rules laid down by the IRS.
You could potentially deduct all costs associated with your flight (including fees for award redemptions), lodging, car rental and gas, and meals for the entire trip. The catch is that more than 50% of the days must have been for business activities (which includes travel time). Note that I said 50% of the days, not 50% of the entire trip.
So, the following 11-day itinerary to Orlando would qualify as a legitimate business expense for a real estate business, including the travel and lodging costs for the trip:
- Day 1 – flying to Orlando
- Day 2– Have an early morning meeting with a realtor to discuss what kinds of property you are looking for. Spend the rest of the day by the pool with the kids.
- Day 3 – Spend 2 hours viewing 3-4 properties with your realtor. Check out the Tier Two attractions in Orlando, like Gatorland or WonderWorks.
- Day 4 – Spend an hour interviewing potential property managers over breakfast. Go on a daytrip for the rest of the day, perhaps to Cape Canaveral.
- Day 5 – Meet with a local banker for an hour to discuss financing options. More pool time in the PM.
- Days 6-10 – Spend all day, every day, at Tier One theme parks. I wouldn’t try to expense the theme park fees though.
- Day 11 – Fly home.
Because you had business activities (which includes travel time) on 6 of the 11 days, this would be a valid business travel, so travel costs, meals, conference fees, and lodging become deductible.
Make sure you are capturing your receipts and tracking your meetings in an online calendar. If, like me, your business has something to do with real estate and you view a property, take a screenshot of the listing or a photo of the house with your phone and file it away in a cloud storage service, like Google Photos.
What are the downsides?
The biggest downside is the potential for complexity, and the need to tackle that complexity by being organized. Thankfully there are lots of apps that make the administrative parts a breeze.
Some of the apps in my toolkit include MileIQ to track and log my automobile mileage for business, and QuickBooks Online so that I can snap pictures of all my receipts and store them in the Cloud before I forget, or worse, lose the receipts.
Will the IRS want to see those receipts in the unlikely event you are audited? You bet! My CPA has made it abundantly clear that credit card statements alone won’t cut it. This is one of those “guilty until proven innocent” areas, where if you do not have the receipt, you’re probably going to be denied the deduction.
In fact, a good CPA familiar with this branch of small business tax law is worth every dime, and I consider mine my enabler for my travel addiction.
If your income is usually reported using a K-2 or 1099, turning your personal travel costs into deductible business expenses is a no-brainer.
But even if you have a full-time job with a W-2 income, you should still consider starting up a business with an EIN if you make some cash with a side hustle.
Not only would you be able to legally stretch your dollar and reduce your taxable income, you would also be able to use that EIN for another awesome perk: getting more travel miles bonuses.
We’ll get to that in a future post.