Bringing family or friends along on a business trip and extending your stay can be an excellent way to fund a portion of your vacation costs and save taxes. But if you’re not careful, you could lose the tax benefits.
Generally, if the primary purpose of your trip is business, then expenses directly attributable to business will be deductible (or excludable from your taxable income if your employer is paying the expenses or reimbursing you through an accountable plan). Reasonable and necessary travel expenses generally include:
- Air, taxi and rail fares,
- Baggage handling,
- Car use or rental,
- Meals, and
Expenses associated with taking extra days for sightseeing, relaxation or other personal activities generally aren’t deductible. Nor is the cost of your spouse or children traveling with you.
How do you determine if your trip is “primarily” for business? One factor is the number of days spent on business vs. pleasure. But some days that you might think are “pleasure” days might actually be “business” days for tax purposes. “Standby days,” for example, may be considered business days, even if you’re not engaged in business-related activities. You also may be able to deduct certain expenses on personal days if tacking the days onto your trip reduces the overall cost.
During your trip it’s critical to carefully document your business vs. personal expenses. Also keep in mind that special limitations apply to foreign travel, luxury water travel and certain convention expenses. For example, no deduction is allowed for expenses relating to a convention, seminar or meeting held outside North America unless it’s reasonable for the meeting to be held there.
For 2012, the gift and estate tax exemption is $5.12 million and the maximum gift and estate tax rate is 35%. Absent additional legislation, for 2013 the exemption will drop to $1 million and the top tax rate will increase to 55%. It’s difficult to predict what Congress will do between now and then, so consider making large gifts before year end to take advantage of the high exemption amount.