Is Your Vacation a Tax Deduction?

Contrary to many social media tax “experts,” just because you paid for your vacation through the business doesn’t make it tax deductible. However, there are smart ways to convert your travel expenses to legitimate tax deductions by using the rules to your advantage. To deduct a trip, the primary purpose must be business-related, it must be ordinary and necessary, directly related to your business, and properly documented. Moreover, there are separate rules for travel within the North American Travel Area and foreign travel. Keep reading to find out how you can maximize tax deductions for travel.

There are three main ways business owners can deduct travel expenses. The first and easiest is to attend continuing education, such as one of our seminars, in an ideal location. The continuing education must be related to your business. For example, practice management and clinical dentistry will easily qualify. However, a real estate or investment seminar unrelated to dentistry would not qualify as a tax-deductible expense. The second is to attend a study club meeting or seminar with other dental colleagues. In a 2016 tax court case, Jones vs. Commissioner, tax deductions were allowed for a 2-doctor seminar, setting precedence for dentists to hold their own training. The third way to deduct travel is by holding a board of directors meeting in your desired location.

To write-off expenses for all three options, you’ll need to conduct business for at least ½ of a normal workday, or four hours per day. For continuing education, your CE certificates and registration will serve as your documentation. For study clubs, dentist-run seminars, and board of directors’ meetings, you’ll need to create your own documentation. Documentation should include the purpose of the meeting, all those in attendance, agenda, and meeting minutes. We recommend creating the agenda ahead of time and circulating to all those in attendance, followed by minutes to be circulated following the meeting. Each day you have a business purpose is considered tax deductible. You don’t need a business purpose for travel days.

The first mistake many dentists make is not having their spouse on payroll. Simply bringing your spouse on a trip doesn’t allow for tax deductions related to their expenses. However, a spouse that’s employed in your practice and helps with management and decision making can have their expenses deducted as well. If you’re incorporated, having your spouse as a member of the board is another great way to keep them formally involved.

For qualifying trips, all travel, lodging, and meals can be deducted. Meals will be limited to 50% of the cost, while travel and lodging expenses will be 100% tax deductible. Any entertainment should be paid for personally, such as golf rounds, spa treatments, event tickets, etc. To keep it simple, almost anything other than entertainment will be deducted.

The rules are different for travel within the North American Travel Area versus foreign destinations. The North American Travel Area generally consists of North America, including the Caribbean. However, trips to foreign destinations, such as Europe, fall into a different set of rules. Generally speaking, travel to Europe and Asia is not deductible, and following the rules to make the trip deductible might take some of the fun out of it. To deduct trips to foreign destinations, you’ll need a legitimate reason for leaving the North American Travel Area.  Specifically, you must have obtained knowledge or skills that weren’t available to learn within the North American Travel Area.

For example, you could drive to a seminar two hours away, or you could learn the same information in St. Thomas. You don’t have to choose the closer destination in this scenario just because it’s more convenient. However, if there is CE available to you locally and also in Europe, you must attend the local CE since Europe is not part of the North American Travel Area.

Make sure to have proper documentation for any trips that you take as part of a business trip. We recommend keeping track of receipts electronically through software such as QuickBooks Online or Dext. CE certificates, meeting notes, agendas, and board meeting minutes should be stored safely in case of audit. While these strategies are legitimate ways to convert travel expenses to tax write-offs, no deduction will be allowed during an audit without the proper documentation.

Need guidance on how to deduct your vacation? Request a call with us!