Keeping journals and some sort of diary-like record during your travels may seem juvenile or tedious, but they can help your cause in sustaining income tax deductions if you're challenged by the Internal Revenue Service.
This is true whether you are on a holiday or on business travel, or any combination of both. The Tax Reform Act of 1986 affects which deductions may be made, their amount, and their impact on your return.
"Deductions will have to be reduced by at least 2% of your adjusted gross income starting with your 1987 returns, and keeping records are more important than ever," said Rob Giannangeli, public affairs officer for the IRS in Los Angeles.
Consult Them First
As interpretations may differ from situation to situation, it would be prudent to check with the IRS and look through the assorted brochures the agency offers to shed light on the subjects of travel and entertainment, education, etc.
When you plan to take care of a few business chores on your holiday, or perhaps think of something after you've already arrived at your destination, your specific expenses for these isolated items of business may be deductible. Don't expect to deduct air fare to Hawaii on a vacation just because you have one business lunch in Honolulu. But the lunch may be deductible (but only for 80% of the cost, under the new rules).
If your primary purpose of travel is business, the entire cost may be deductible minus any expenses for the vacation portion of your trip. The rules vary for deducting transportation expenses, for domestic and international travel, and for when you are out of the United States for less than a week and for longer.
On international travel, for example, you would generally have to show that you spent more than 75% of your time on business if transportation is to be fully deductible. If you're away internationally for less than a week, and the pleasure portion of your trip was less than 25%, you can probably deduct all of your transportation costs.
Any expenses that would be reimbursed, such as from an employer, aren't deductible.
The cardinal rule to remember about any travel expense deduction is that a business intent has to be shown and documented. However, only ordinary and necessary travel expenses (as interpreted by the IRS) will be accepted. These include transportation, accommodations, meals and entertainment.
If the IRS questions your return, notations about your activities will aid your explanations. Having a record is supportive evidence. It helps to be thorough in jotting things down, and in getting and keeping receipts.
Both records and receipts are needed. Your records should include the time, place, purpose of the meeting or activity, who or what is involved in your work or appointment, and the expense involved.
Documentation is required for any deductions for expenses over $25. Exemptions to this rule may be allowed when receipts are hard to get, such as on a long-distance taxi fare to and from an airport and hotel.
The IRS will still accept your notations on your credit card statements as a valid record. Canceled checks by themselves, however, may not always be accepted in lieu of other written evidence such as a statement, voucher or bill.
As for deductions on travel for educational purposes, the guideline remains that you need to show that the expense is to maintain or improve your skill in your present work or business. Travel expenses to learn a new skill won't pass muster. The educational portion of your trip has to be your primary reason for travel, with study taking up more than 50% of your time.
Deductions for less formal study, or travel as a form of education, have been eliminated, Giannangeli said. "The only deductions that may be allowed in this area are those that are an adjunct to formal educational activities."
A Hard Look
While the IRS is still accepting deductions for travel, food, accommodations and related expenses of volunteers on scientific research expeditions, it is taking a longer look at these deductions. The sponsor of the trip has to have nonprofit status in the United States and you must be helping with the work and not just going on a vacation. "The 1986 Act specifically addresses this subject. You can't be spending any significant amount of time on vacation-type activities," Giannangeli said.
Transportation expenses for medical reasons may still be deductible in some cases. For example, if your doctor advises you to go to a warm-weather location to alleviate some chronic condition, your travel costs going to that destination may be deductible. But expenses while at the location wouldn't be deductible.
Similarly, if you become ill overseas and have to pay extra to get home for treatment, those expenses might be deductible.
If you're out of the country on April 15 and haven't filed your return, the IRS will automatically extend your deadline to June 16 if you attach an explanatory note to your return (long forms only).
You'll still have to pay interest on any money that the IRS deems you owe from April 15 until you file. To get around this, you can estimate what you owe and send the amount in with Form 4868 by April 15. This will give you a four-month extension to Aug. 15 in which to file your full return, but you'll still owe interest on your unpaid taxes if your estimated payment is off the mark.
Some brochures you can get free from the IRS are 463, Travel, Entertainment & Gift Expenses; 508, Educational Expenses, and 529, Miscellaneous Deductions.
Meanwhile, keep your records/receipts in a safe place.