ELITE ADVISOR BEST PRACTICES
Writing Off Ski Vacations by Making Where You Schuss a Secondary Office
The best of both worlds is possible, but you need to have a principal office in another state that you travel from to conduct business when you’re not on the slopes.
By Glenn S. Demby, Esq.
- Winter ski vacations and summer beach vacations aren’t just good leisure; they can be good for business if you’re able to turn the situation into a tax savings opportunity.
- The opportunity lies in the fact that business travel is deductible between a principal place of business and another location of the same business.
- For your clients to take advantage of this opportunity, they must be able to demonstrate which location is their principal place of business.
- Clients also need to keep detailed travel expenditure records to audit-proof their deductions.
Colorado is a beautiful place to live and work, especially if you’re a skier. But if you love the beach, it’s not where you want to hang out in the summer.
Florida is another great place to live and work. But you might not like dealing with all those northern snowbirds who migrate down there in the winter.
Suppose you could have an office in both places so you could enjoy Colorado in the winter and Florida in the summer? And if traveling back and forth between those locations were tax deductible, you’d have a situation that’s personally desirable and also generates major tax savings for your business.
Well, guess what? If any of your small business owner clients have the wherewithal to maintain offices in Florida and Colorado (or any other two states in the U.S., for that matter), they can realize the joy of being in whichever location they want whenever they want to be there—and accrue tax savings for the travel costs associated with getting there. You just need to tell them how.
Tax deductions for travel between business locations
This deduction opportunity is based on two pretty straightforward tax rules. Although most tax advisors know the rules, they sometimes overlook the potent tax savings implications that arise when those rules are combined.
Rule 1: When taxpayers have two or more regular places of business, their tax home is considered to be their principal place of business.
Rule 2: Taxpayers are allowed to deduct the expenses of traveling from their principal place of business to their non-principal place of business to perform business there.
Example: Your client, “Mo Beale,” owns a small business with offices in Colorado and Florida. The Florida office is her principal place of business. So that’s where her tax home is. But she also spends three months a year doing business in the Colorado office. Not coincidentally, those three months are the height of ski season. Accordingly, Mo skis on the days she’s not working.
Result: Mo may deduct as a business expense the cost of traveling to Colorado for her annual three-month business stay/ski vacation.
Determining which location is the principal place of business
Of course, when taxpayers have multiple business locations, the challenge is to determine which one is the principal place of business. Such determination must be made on a case-by-case basis by applying three key factors:
- The total time the taxpayer ordinarily spends at each business location
- The degree of business activity conducted at each location
- The financial return attributable to each location
Example: Suppose Mo spends nine months a year in her Florida location, from which she generates 70 percent of her gross income and 72 percent of her total financial return from all endeavors. Her principal place of business and tax home would clearly be in Florida.
Result: Travel to her Colorado office for three months of business activity would be considered deductible business travel, even if Mo also manages to squeeze in some skiing.
Conclusion: Don’t forget the paperwork
Make sure your clients are aware of these rules. And remind them that they need to keep a log or diary to document their expenses any time they travel away from home overnight on business.
Explanation: To claim business travel deductions, you must be able to prove dollar amounts, time, place and business purposes of your travel expenditures. The IRS likes its proof in writing. (Note, though, that written receipts aren’t required for travel expenses of less than $75, provided that such expenses are not for lodging.)
The timing is also crucial. The IRS wants you to keep records of travel expenses as you incur them, or soon afterwards. The good news is that the IRS has made it abundantly clear that you and your clients can comply with this requirement simply by maintaining a weekly log of vacation home use at or near the time of use. So urge your clients to keep weekly logs or diaries of business travel expenses just in case IRS auditors come a-knocking.