One of the joys of being a freelancer is the freedom to work from different locales and even use those expenses to reduce your taxes. As entrepreneurs, we are often aware of how to deduct our business expenses when a trip is purely work-related, however few understand how easy it can be to turn a pleasure jaunt into a deductible business trip.
One of the reasons for this oversight is the daunting length of the tax code (10x the size of the Bible!), not to mention its complexity. But with a few pieces of advice and the help of a business savvy tax accountant, most of us can be saving thousands of dollars a year! The key is understanding what legitimately qualifies a vacation as a business trip.
When it comes to maximizing your travel deductions, planning ahead plays a huge role. Let me explain.
There are two kinds of travel expenses: transportation (the cost of getting to your destination and back) and on-the-road expenses (lodging, car rental and meals, for example).
Transportation expenses are only deductible if at least half of your travel days are business days. What’s a business day?
- A day on which you perform some kind of work. These are some examples for a web designer:
- Your presence is required at an event. For example, you could be a guest speaker at a Meetup for web designers, which would help you show other designers what you do so they can refer clients to you. Finding Meetups in your industry is pretty easy, isn’t it?
- You attend an event or seminar to learn about a new technology to build websites. To qualify a day as a business day by attending events, they need to be at least 4 hours and 1 minute. This could be one single event, or multiple events that add up to at least 4 hours and 1 minute.
- You meet with colleagues to improve skills. For example, your could meet with successful web designers and learn what’s working for them, or visit successful web design shops and discuss how you could work together and refer business to each other.
- Travel days are considered business days. If you travel overnight, both days are considered business days as long as you take a reasonable route to get to your destination.
- Weekends and holidays between actual work days are also considered business days.
- When you can’t work due to circumstances beyond your control (like a flight cancellation or a prospect calling off a meeting), these days still count as business days.
Let’s say I fly to Hawaii on Monday, take three vacation days (Tuesday, Wednesday and Thursday), I speak at a web design Meetup on Friday for 1 hour, spend Saturday, Sunday and Monday (Labor Day) exploring different beaches, meet with a local design agency for 1 hour on Tuesday to discuss the possibility of working together, then take two more vacation days (Wednesday and Thursday) and fly back home on Friday.
Even though the actual time I’d spend working is 2 hours, this is considered seven business days! What? How? We have two actual work days, two travel days, and three sandwich days between meetings, for a grand total of seven days.
Because seven business days is more than half the total days (12), I can deduct 100% of the cost of the flight.
On-the-road expenses are only deductible on business days. This means that, for seven of the 12 days of my trip I can deduct 100% of my hotel, car rental and Uber rides, for example. Meals are 50% deductible on business days.
For the other five non-business days, none of my expenses are deductible.
Other Travel Deduction Rules
- Although the requirement to deduct transportation costs for domestic travel is that 51%+ of your days are business days, when it comes to international travel, 76%+ of your days must be business days.
- An exception to this rule is when the total length of the trip is a week or less.
- “Domestic travel” isn’t only the continental United States and its territories (like Guam and American Samoa), but also Canada, Mexico, Jamaica, Costa Rica, Barbados, Dominican Republic, Dominica, Guyana, Honduras, Trinidad, Tobago, Palau, Grenada, Marshall Islands, Micronesia, Jarvis Island, Johnston Island, and Kingman Reef.
- If you attend a conference or seminar outside the areas mentioned above, you need to have a pretty good reason for being there. You can’t justify a trip to Australia to learn a skill you could learn in your hometown, unless the quality of the learning event in Australia would provide a clear business advantage over learning the same skill from a local instructor. But even when this isn’t the case, if you see potential in expanding your business to Australia, you could meet with Australian agencies and prospects to get new business, and this would be a valid business reason to travel to Australia.
- You can bring your spouse or significant other and deduct their expenses if they’re an employee of your company, or they’re traveling for a business purpose. For example, they could take care of all the appointment bookings and travel planning. Or, when you speak at Meetups or attend networking events, they could go around meeting people, establishing relationships, talking about your business and working on getting referrals. To do this, they need to know about your business and be prepared to represent it.
- If you bring someone with you as a guest, lodging and meal expenses can be deducted as long as the deduction is in the amount that you’d normally pay if you had stayed by yourself. For example, if a hotel’s single rate is $100 and its double rate is $120, you can deduct $100 even if you pay $120 for a double. If you do this, make sure you save a screenshot of the hotel rates or take a picture of the rate sheet.
- If you travel somewhere and go back home the same day, you can’t deduct it. If you spend the night at a hotel in your hometown, you can’t deduct this either.
- If you drive to your destination, the IRS will calculate the number of business days by dividing the total length of the trip by 300 miles. For example, the drive from Seattle to San Francisco is 808 miles, so you could break it down into three days each way, for a total of six business days.
- At 53.5 cents per mile, you’d get $864 in mileage deductions.
- On-the-road expenses for the six days you’re on the road would be deductible. For example, hotels would be 100% deductible and meals would be 50% deductible.
- The IRS expects you to take a direct route to your destination. You can take detours for sightseeing if you want, but the extra miles you drive wouldn’t be deductible, and neither would be the on-the-road expenses for any extra days you take for sightseeing.
- You can take seminars on cruise ships and deduct their cost up to $2,000 per year per person as long as 51%+ of the total days are business days.
- The ship needs to be a U.S. vessel and all the ports of call must be in the United States and its territories.
- You need to submit two statements with your tax returns. One signed by you with the days of transportation, number of hours of the trip and the seminar schedule. The second one, signed by the company providing the training or an officer of the ship showing the number of hours of the seminar and how many of those hours you attended.
Detailed documentation is required to prove the business intent of travel.
- There needs to be a pre-existing business intent for the trip. This usually means setting up meetings in advance (email is great to document this). You don’t need to schedule all your meetings in advance, but it’s a good idea to do it for as many of them as possible.
- Keep a diary of each business trip: dates of departure and arrival, trip itinerary, names of the people you meet with, what was discussed in these meetings, when and where the meetings took place and how long they lasted, how your business benefitted from the trip (what you learned, what you did to get new clients, etc.) and what events you attended.
- The easiest way to do this is to keep screenshots of emails, event tickets, flight itineraries and any other relevant documents.
How to Record Travel Expenses
- If 51%+ of your travel days are business, the transportation cost can be fully deducted, so you should record these business expenses in Billy.
- Meals on business days are deductible (even they’re not business meals), and they should go in Billy. Meals on non-business days are personal expenses.
- Some on-the-road expenses are partially deductible, like lodging and car rentals. Keep track of these in your Hybrid Deductions document and indicate how many of your travel days were business, as this is the basis your accountant will use to calculate what portion of these on-the-road expenses can be written off.
- If all your travel days are business days, then you should enter all your on-the-road expenses into Billy.
- Billy lets you attach files to your transactions so you can keep everything organized for your accountant. For example, if you buy a plane ticket, you can attach the itinerary to the bill in Billy.
As you can see, with some advanced leg-work and adherence to the above guidelines, that beautiful trip to Barcelona can not only be both a joyful vacation but a profitable business venture too.
So get out there and take advantage of all the travel perks of being a freelancer.
While we work to ensure that all information provided is accurate, every tax situation is different. We encourage you to consult with your local tax professional (attorney and/or accountant) before making any decisions that may impact your business. Information provided should not be used in lieu of the advice of a professional that knows the entirety of your situation.