It\u2019s 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\u00a0meandering around. After spending a few years in DC, I can\u2019t fathom why in the world people don\u2019t walk up and down the escalators. I\u2019ve got places to be, people!<\/p>\n
Anyway, let\u2019s talk taxes.<\/p>\n
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\u2019t it be nice to deduct your travel expenses and effectively realize a small holiday bonus?<\/p>\n
For tax purposes, travel expenses must meet three tests:<\/p>\n
An ordinary expense is one that is common in your business. A necessary expense is one that is helpful and appropriate for your business.<\/p>\n
You are traveling away from home if your business requires you to be away from the general area of your \u201ctax home\u201d 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 \u201crest\u201d test, you need to stay the night.<\/p>\n
Your tax home is defined as \u201cyour regular place of business or post of duty.\u201d 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\u2019d meet the \u201ctraveling away from home\u201d test any time I travel to my rental in NC.<\/p>\n
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.<\/p>\n
On top of the above rules, your trip must be primarily for business purposes<\/strong>. This means that greater than 50% of your days must be considered \u201cbusiness days.\u201d 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.<\/p>\n 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\u2019ve put in your four hours and can count the day as a business day.<\/p>\n Related:<\/strong> How to Prove Tax Deductions as an Investor: A Guide to Tracking Receipts<\/a><\/em><\/p>\n Additionally, there is this special rule called the \u201csandwich rule.\u201d Basically, this rule allows you to count weekends as travel days even if you don\u2019t perform any work. The logic is that weekends are for rest and are not officially working days.<\/p>\n For example, let\u2019s assume you are going on a six-day trip to monitor the rehab<\/a> on a new rental<\/a>. 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 \u201cbusiness days,\u201d qualifying your expenses as deductible travel expenses:<\/p>\n 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!<\/p>\n 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.<\/p>\n 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.<\/p>\n 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:<\/p>\n 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.<\/p>\n 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).<\/p>\n Documentation is imperative in regard to business trips. The integrity of the trip will only be substantiated with proper documentation.<\/p>\n 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?<\/p>\n Some documentation ideas for you, in no particular order:<\/p>\n It\u2019s important to accurately and efficiently track your various expenses. Efficiently does not mean the \u201cshoe box method,\u201d where you collect paper receipts and try to sort them out at year end. Talk about unnecessary headaches.<\/p>\n Luckily, today\u2019s technology simplifies the documentation requirements. While I don\u2019t 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 \u201corganizing\u201d fees.<\/p>\n Related:<\/strong> The Ultimate Guide to Real Estate Investment Tax Benefits<\/a><\/em><\/p>\n\n
Deductible Expenses<\/h2>\n
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Document Like Your Life Depends on It<\/h2>\n
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My Favorite Apps<\/h2>\n