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Are Vacations Tax Deductible?

Let’s get one thing straight: vacation costs are not deductible. They’re not deductible for an individual, and they’re not deductible for a business.

However, this does not mean that travel expenses are nondeductible. If your client is a business owner and travels for work, they can deduct those costs as a legitimate business expense.

What they need to be careful about is when their work trip has elements of pleasure in it. If a personal vacation is simply masquerading as a work trip, your client will likely lose their deduction.But there are things you can do as your client’s tax advisor to help them get the full travel deduction.

Who Gets to Deduct Travel Expenses: The Employee or the Business?

The answer to this question depends on who pays for the travel expenses.

If the business pays for the travel expenses, they are deductible alongside other legitimate business expenses like rent, supplies, and payroll. But if an individual pays for them (and does not get reimbursed by their employer), those costs become nondeductible. This is true even if the employee incurred those costs to perform required job duties.

But why can’t individuals deduct travel costs?

Prior to 2018, unreimbursed business expenses (including travel) were deductible for an individual when those costs exceeded 2% of their adjusted gross income (AGI). When Congress passed the Tax Cuts and Jobs Act (TCJA), they eliminated the 2% miscellaneous itemized deduction through 2025. There is no other mechanism that allows taxpayers to deduct travel expenses incurred on behalf of an employer on their tax returns.

But business owners are a different story. If your client is a small business owner, they can deduct legitimate business expenses from business income. This includes expenses related to travel.

What Travel Costs are Deductible?

To be deductible, travel expenses must be ordinary and necessary to perform work duties. Fortunately, the types of expenses that qualify for the travel tax deduction are far-reaching. They include:

  • Travel fare to get to the destination, or to get around once at the destination, like:
    • Cab or Uber fare to the airport
    •  Airplane ticket to the destination city
    •  Train ticket to the hotel
    •  Bus fare to get to dinner
    •  Rental car costs
    •  Toll fees
    • Gasoline or standard deduction mileage costs
  • Costs to transport items to the destination, like:
    • Baggage fees
    • Shipping costs for key work documents, presentation materials, samples, etc.
  • Food (subject to limitations)
  • Lodging
  • Costs for essential services incurred while traveling, like:
    •  Dry cleaning and laundry services
    • Computer and equipment rental costs
    • Rental of a temporary work location
    • Wi-Fi
    • Additional cell phone fees for using a hotspot
  • Tips for services, like when tipping:
    • The bellhop
    • The Uber driver
    • Restaurant servers

What Happens When a Work Trip Turns into a Vacation?

When traveling out of town for work, some people will stay an extra few days and tack on a vacation. In this scenario, expenses incurred during the work event (that are necessary to attend the work event) would be deductible. Costs incurred during the vacation portion of the trip would be nondeductible.

EXAMPLE:

Your client travels to Hawaii for a work conference, paid for by the business. The conference lasts for five days. Your client chooses to extend their stay in Hawaii by an additional week.

QUESTION: What costs are deductible?

ANSWER: The costs of travel to and from Hawaii are deductible to the business because they were necessary to get your client to the work conference and back. Amounts for meals and lodging your client spent during the five days they were attending the conference are also deductible. Any meals, lodging, or travel costs outside of those conference days would be nondeductible vacation costs. If your client went on an excursion during the five-day conference that was unrelated to the work events – like an evening helicopter ride to see the sights – that cost would also be nondeductible.

But the deductibility of travel expenses isn’t always so clear-cut. If your client travels to a vacation destination and performs work duties while there, the IRS may reject their travel deduction.

EXAMPLE:

Your client is a self-employed photographer. They want to get stock footage at three Utah National Parks to use in their portfolio. While in Utah, they go hiking, mountain biking, and relax in their Airbnb.

QUESTION: Would their entire trip be deductible?

ANSWER: It depends. If the trip is primarily for business and your clients can provide proof that it was, the travel costs are fully deductible. If the trip is primarily for vacation, the entire trip will be nondeductible, even if they performed some work duties on vacation. Your client needs to be honest about the purpose of their vacation.

How Can Your Clients Get the Full Travel Deduction?

The IRS provides useful information that can help you determine if your client’s travel is deductible, but here are a few easy things they should do:

Document the purpose for traveling

Your client must be able to prove that their trip was primarily for a business purpose. Proof will vary in each circumstance, but here are a few examples:

  • If your client attended a conference, have them screenshot the conference itinerary from the website.
  • If your client visited a customer or vendor, keep email records that show when and where they met and what they discussed.
  • If your client is self-employed, they should provide planning documents for their trip. For the photographer from our previous example, these planning documents might include:
    •  A shot list
    • A travel itinerary with business goals for each location
    • Information about collaborations with local artists
    • Fees for local models
    • Prop or equipment rentals
    • Plans for how they plan to use those photos

Keep good records

For amounts greater than $75, your client will need to have receipts to substantiate their expenses. They will not need to provide these receipts with their tax return, but they should have them ready in the event the IRS questions the deduction. The documents should show dates and itemized expenses. If your client needs to substantiate meal costs, itemization is especially important. The meal allowance is tricky. Meals that accompany entertainment expenses are deductible, but only if the receipt clearly delineates those two costs.

The IRS recommends that your client keep records for three years from the date they filed their tax return.

Know how to allocate costs

If your client incurs costs that apply to both their work trip and their vacation, you’ll need to know how to allocate those costs. Consider the costs of renting a car. If your client attended a work conference for three days and took a vacation the following six days, only a third of the rental car costs would be deductible. The IRS will also consider who else is using the vehicle. If, for example, your client and their colleague share the rental car, only your client’s half of those costs would be deductible to the business. The other half would be deductible to their colleague’s business.

Extending a work trip into a vacation isn’t necessarily a bad move. As long as your clients are aware that they’ll need to substantiate their reason for traveling, they should be in the clear. If you want to dive deeper into other possible deductions besides travel, tax planning software can find potential savings at both the individual and business level.

Start Saving Clients Money with Tax Planning Software

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