It’s that time of year again. Airports and roads are congested with people and vehicles. Northerners and Southerners cross paths and wonder how the other can possibly live such polar opposite lives. Trust me, I know. I used to be the Southerner leisurely meandering around. After spending a few years in DC, I can’t fathom why in the world people don’t walk up and down the escalators. I’ve got places to be, people!
Anyway, let’s talk taxes.
Many people find themselves traveling over the holidays. Real estate investors and business owners may be able to strategically plan their holiday trips so that the associated costs are deductible. Wouldn’t it be nice to deduct your travel expenses and effectively realize a small holiday bonus?
The Basic Rules
For tax purposes, travel expenses must meet three tests:
- Travel expenses are ordinary,
- Travel expenses are necessary, and
- You are traveling away from home for your business.
An ordinary expense is one that is common in your business. A necessary expense is one that is helpful and appropriate for your business.
You are traveling away from home if your business requires you to be away from the general area of your “tax home” substantially longer than an ordinary day’s work and you need to sleep or rest to meet the demands of your work while away from home. Generally, to satisfy the “rest” test, you need to stay the night.
Your tax home is defined as “your regular place of business or post of duty.” It includes the entire city or general area in which your business or work is located. So if you have a full-time job but invest at a distance, your tax home is likely where your full-time job is located. For instance, I live in DC and work out of DC but have a rental in NC where my family lives. Because my tax home is DC, I’d meet the “traveling away from home” test any time I travel to my rental in NC.
If you do not have a regular or main place of business or post of duty and there is no place where you regularly live, you are considered to be a transient and your tax home is wherever you are working at the given time. As transient, you cannot claim a travel expense deduction because you are never considered to be traveling away from home.
On top of the above rules, your trip must be primarily for business purposes. This means that greater than 50% of your days must be considered “business days.” If you are traveling for eight days, five of them must be considered business days for the trip to be deductible as a business trip. If you are traveling for seven days, four of the days must be business days — I think you have the idea.
Any day that you spend at least four hours working in or on your business will count as a business day. This also includes travel time to and from your destination. So if you leave your house at 1:00 p.m. on Sunday and it takes you at least four hours to get to your trip destination, you’ve put in your four hours and can count the day as a business day.
Additionally, there is this special rule called the “sandwich rule.” Basically, this rule allows you to count weekends as travel days even if you don’t perform any work. The logic is that weekends are for rest and are not officially working days.
For example, let’s assume you are going on a six-day trip to monitor the rehab on a new rental. You drive for six hours on Saturday and arrive at your destination. You hang out on Sunday, and you actually go to the job site on Monday, where you spend your entire day monitoring the rehab. The rehab finished early, so you hang out on Tuesday and Wednesday and drive back home Thursday (another six-hour drive). You have qualified four days as “business days,” qualifying your expenses as deductible travel expenses:
- Saturday: travel to destination,
- Sunday: sandwich,
- Monday: at least four hours of work, and
- Thursday: travel home.
Strategically planning your trips like the above can allow you to enjoy large write-offs of your travel expenses. Another great reason to touch base with your CPA!
Assuming you satisfy the three tests discussed above, the next step is to analyze what expenses you may deduct as a business expenses. Keep in mind that what is deductible is dependent on your specific facts and circumstances, but generally expenses will include but are not limited to: transportation to and from the airport, tax/Uber/public transportation, baggage costs, lodging and meals, cleaning, telephone, and tips.
Be careful on the meals, though. You can deduct the cost of meals only if it is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business; business is discussed immediately before, during or after the meal; or the meal is business-related entertainment.
Many times, people will ask me if they can deduct the cost of their spouse and/or children. The answer is yes, only if the other person:
- Is your employee, substantiated by an employment agreement;
- Has a bona fide business purpose for the travel; and
- Would otherwise be allowed to deduct the travel expenses on their own.
Most people cannot meet all three of these tests and therefore cannot deduct the travel costs of their families. But with some strategic and creative tax planning, we can certainly look at making something like this happen as a legitimate expense.
Document Like Your Life Depends on It
Real estate investors generally do a decent job at maintaining their documents, but some would rather pull their hair out than document anything (looking at you, rehabbers).
Documentation is imperative in regard to business trips. The integrity of the trip will only be substantiated with proper documentation.
Your objective should be to create a paper trail, but not just in terms of receipts. You will want to substantiate that you were at a particular place at a particular time. Maybe you are meeting your property manager for lunch and you document the receipt, but you take it a step further and grab her business card or have her initial the receipt. Yeah, it might sound insane, but when the IRS is snooping through your business and you are able to show how well you document your trips, how much more time do you think they will waste sifting through your trip details?
Some documentation ideas for you, in no particular order:
- Receipts, obviously. Write on top of meal receipts who you met and what was discussed with for bonus points.
- Communications with real estate agents, property managers, contractors, etc. You should print off emails and text communications that provide details for meeting times and locations.
- Business cards.
- Fliers. If you are viewing houses or comparing companies, you can use fliers to document the fact that you were where you claimed you were.
- Photos with time-stamps. Yes, you can take photos of houses you are viewing or the repairs you are making on a current property. It’s best if the photos are time-stamped or if the time-stamp is recorded in the metadata.
- Leases and rental applications.
My Favorite Apps
It’s important to accurately and efficiently track your various expenses. Efficiently does not mean the “shoe box method,” where you collect paper receipts and try to sort them out at year end. Talk about unnecessary headaches.
Luckily, today’s technology simplifies the documentation requirements. While I don’t have any affiliation with the two apps listed below, I assure you that they will make your CPA a happy camper come tax time. Which of course means you get to avoid those pesky “organizing” fees.
A great app to track mileage is called MileIQ. The app uses your iOS device’s integrated GPS and uses current gas prices to calculate the actual trip expenses in case you’d rather use the actual expense method over the standard mileage rate method. MileIQ makes it easy to separate your business and personal trips and even allows you to export the data to Excel or a .PDF file.
For all of other random expenses, I use Expensify. It’s a fantastic way to record an expense quickly and because it allows you to scan in a receipt, you will always have your supporting documentation handy. Expensify also allows you to export reports.
At year-end, you can export your reports from these apps and log the expenses and make one entry into your bookkeeping software. Easy stuff.
A Final Note: Travel Expenses That You Can’t Deduct
It’s important to understand that there are travel expenses that you may not deduct. These include any business trip undertaken to explore new investment opportunities in a geographical region where you have yet to purchase a property.
For instance, I live in DC and have a property in Western NC. If I choose to explore investment opportunities in Raleigh, my trip expenses are non-deductible — until I close on a property in that region, at which point the costs will be added to the property’s basis and depreciated over 27.5 years.
On the other hand, if I took a trip to explore opportunities right down the road from my current rental, my trip expenses are all deductible as “expansion costs.” It’s confusing stuff, so make sure you loop in your tax expert.
I hope this article helps some of you save money with your holiday trips. Plan strategically and you’ll enjoy a solid holiday bonus!
Disclaimer: This article does not constitute legal advice. As always, consult your CPA or accountant before implementing any tax strategies to ensure that these methods fit with your particular situation.
Investors: Have you ever deducted expenses from your holiday trips? Any questions not covered by this article?
Leave your comments below!