Tax write-off varies when mixing work with play

PERSONAL FINANCE

June 25, 2006|By EILEEN AMBROSE | EILEEN AMBROSE,SUN COLUMNIST

People traveling on business often tack on a little vacation time. After all, if you have to spend several days stuck in a hotel conference room in Hawaii, why not take an extra day or so for yourself to visit a pineapple farm or lie on the beach - especially if Uncle Sam might help pay for it?

One benefit of mixing business with pleasure is that you may be able to deduct the job-related expenses on your federal tax return, reducing the cost of the vacation. That airfare to Hawaii, for instance, may be fully deductible if work is the primary purpose of the trip.

Of course, that might lead to confusion about what's deductible - or prompt some people to inflate deductions.

"Just because you talk to someone on the airplane [about work], doesn't make the trip a business trip," said Bob D. Scharin, a senior tax analyst with RIA, a tax information provider in New York.

On the other hand, tax experts say, chatting over drinks about your business with someone who later becomes a client may entitle you to deduct part of the bar tab.

So, who can deduct trips and how much?

Basically, employees can deduct business expenses that are not reimbursed by an employer. But they can only deduct those costs, along with certain other miscellaneous expenses, that exceed 2 percent of adjusted gross income.

Self-employed individuals don't have to meet the 2 percent threshold and are more likely to deduct travel expenses, Scharin said.

Additionally, hotel and transportation costs are generally fully deductible. Half the cost of meals and entertainment while working are also deductible.

If you're considering combining work and play on trips, here are some guidelines:

Business first. To get the most out of deductions, the trip must be primarily for business. (If you're on vacation and do a little business, you can deduct any work-related costs such as phone calls, but you won't be able to deduct airfare, Scharin said.)

Jeff Lawson, an accountant in Towson, recalled a former client who wanted to deduct a weeklong family vacation to the Caribbean as a business expense, saying family members were researching office space on an island.

"We told them they can't deduct it," Lawson said.

Here's the best way to determine whether your trip is more business than pleasure: Ask yourself if you're traveling because you must meet with a client, or whether you are visiting the customer only because your mother lives nearby, Scharin said.

If it's the former, then it's a business trip, he said.

Hotels. You are entitled to deduct the cost of a hotel during the days you are conducting business, Scharin said.

What if your business meetings fall on Friday and Monday? "Then since you need to stay around for the weekend, you would be able to treat those as business days," Scharin said.

Similarly, if you can get a much cheaper flight by staying over on a Saturday, you would be able to deduct the extra night in the hotel, Lawson said. "Saving money makes good business sense," he said.

If you're traveling with a spouse, you can deduct the cost of the hotel's rate for a single room even though you're sharing a double, Scharin said. Still, many hotels don't charge much more for two people, so you get to deduct much of the hotel's cost, he said.

Bringing the family. Generally, you can't deduct costs related to a spouse or children. However, if your mate works for the same company and has a business reason for going on the trip, then his or her expenses may also be deductible.

Sometimes business travelers opt to drive rather than fly. This way, they can deduct the standard rate of 44 1/2 cents per mile or the actual cost of driving.

The deduction is the same whether the business traveler is alone or has all the kids crammed into the car, too.

Foreign travel. Those traveling abroad for more than one week must make a calculation to determine how much of the transportation costs are deductible.

Basically, they figure what percentage of the time is spent on business and deduct that percentage of the transportation costs. So, if seven of the 10 days spent in London are for business, then the deduction is 70 percent of the airfare.

The exception: Spend less than 25 percent of the trip on personal travel, and you don't have to do the calculation, Scharin said. You can deduct the full airfare.

The rules on food and hotel are the same whether here or abroad.

Record-keeping. Because of the potential of business travelers inflating deductions, the IRS will likely look closely during audits at business expenses that appear to be more play than work, tax experts said.

Business travelers need to keep detailed records - copies of seminar schedules, registration receipts, correspondence with clients setting up meetings and a day planner that describes work-related activities during the trip.

"That meeting planner has saved people numerous times," said Kevin Howard, a Columbia accountant.

While you're away. You can earn some tax-free money if you're willing to rent your house while you're gone. Those who lease their house for no more than two weeks a year do not have to report the rent as taxable income.

Usually, those who rent their homes live in a city that's a tourist attraction or that is host to a major event, like the Super Bowl. But that isn't a requirement.

"If someone in the neighborhood has relatives over and doesn't want them in the house and is willing to pay you, then go for it," Scharin said.

eileen.ambrose@baltsun.com

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