Each year, thousands of parents drive their soon-to-be high school graduates all over the country in search of that one college institution that will transform their child into the next Warren Buffett, Sam Walton, or Kenny G, who received a degree in accounting from the University of Washington before becoming a Grammy-award winning saxophonist. These family trips across the country can often take parents closer to their business interests as well, allowing them to take a day or two out of the family trip to call on an account, a prospective client or even to check in on an investment rental property. Though there could be many reasonable and necessary business expenses incurred in such a situation, caution should be taken before deducting all of the travel expenses incurred on your individual tax return…like Jim, that guy in your fantasy football league, said you could.
For this example, we will assume that you are a sole proprietor who reports all business activity on schedule C of your personal return. The example would also be applicable to someone who owns and rents out properties (schedule E) or incurred unreimbursed business expenses related to work for his or her employer. You and your family are from Ohio, and you are taking a week-long trip to the east coast to visit a number of universities that your 17-year-old son may attend. During the week, you take the opportunity to visit a client in Virginia for a lunch meeting. Since you incurred all of the expenses to travel to the client and pay for his or her lunch, you should be able to deduct all of these as business expenses, right? The answer in this case is no. Let’s analyze.
The current IRS code states that “if the trip is primarily personal in nature, the traveling expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at such destination…[but], expenses while at the destination which are properly allocable to the taxpayer’s trade or business are deductible.” (Reg §1.162-2(b)(1)). To determine whether the trip is primarily business or personal in nature, the IRS examines the facts and circumstances in each case, often using the amount of time split between business and personal activities as an important factor (Reg §1.162-2(b)(2)).
Given that the main purpose and the majority of the time spent on the trip in our example is personal in nature, the travel expenses incurred to drive to the east coast and back would not be deductible. However, the cost of the client lunch would be deductible since it can be properly allocated to a trade or business (Note: the cost of the client lunch would be only 50 percent deductible due to a limitation on the deductibility of business meals per IRS code section 274).
* Thank you to Andy Nentwich, Tax Senior for his contributions to this post.