Mixing Pleasure and Business: Are Vacations in the 21st Century Deductible?

Technological developments of the 21st century have been transformative.  Anyone can be in constant contact with their offices and clients, even while away on vacation.  Technology has essentially erased the physical boundaries between a place of work and almost any vacation location on the planet. The deductibility of business expenses while away from the office is explored in this article.

When it comes to vacations and taxation, several Internal Revenue Code Sections come into play. First, Section 262 declares that "no deduction shall be allowed for personal, living, or family expenses." Accordingly, on the face of it, any and all expenses incurred while away on vacation should not be deductible.

But Section 162, which permits the deductibility of ordinary and necessary business-related expenses, relaxes the strict limitations imposed by Section 262.  Specifically, business expenses incurred while on vacation open the door to possible tax deductions.

Most technology-related expenses (cell phones, connectivity charges, printing, fax charges, and the like) are deductible to the extent that they are necessary to maintain contact with staff and clients while away from a place of business. Nevertheless, vacationing taxpayers should not be lulled into thinking that because they log on to their computers on a daily basis to check their e-mails, or regularly call into their offices, their vacation expenses are now entirely deductible. Likewise, taxpayers should not think that even some part of the vacation expenses they incur are now deductible based on the ratio of the hours spent doing business-related work vs. being away from home on vacation.

The main reason that such expenses are not deductible is due to the scope of Section 162, as defined by a long line of case law that addresses travel expenses incurred while away from home. The U.S. Supreme Court set the standard for deductibility of travel expenses in Commissioner v. Flowers, 326 US 465 , 66 S. Ct. 250, 90 L Ed 203 (1946). The Court held that the following three conditions must be met before a travel expense is deductible:

1. The expense must be a reasonable and necessary "travel expense," as that term is generally understood.
2. The expense must be incurred "while away from home."
3. The expense must be incurred in pursuit of business. This means that there must be a direct connection between the expenditure and the carrying on of the trade or business of the taxpayer or of the employer. Moreover, such expenditures must be necessary or appropriate to the development and pursuit of the business or trade.

For most vacationing taxpayers, satisfying the third Flowers condition of deductibility is likely to be the most problematic. Taxpayers must prove there is a "direct connection" between the vacation expenses they incur and the furtherance of their business enterprise.  But there is nothing about being away from the office that enhances the prospects that the business issues under discussion will be more successful simply because the taxpayer, for example, is relaxing in a hammock in the Bahamas rather than being stressed out in her regular office.  To the contrary, the IRS may argue that the prospects for successful business endeavors are diminished while the taxpayer vacations because the taxpayer lacks immediate access to the resources typically found in an office environment, such as management advice, secretarial assistance, photocopy machines, and the like.

The fact is that the vast majority of vacationing taxpayers incur expenses first and foremost specifically to get away from their businesses. This is evident for most people when they are accompanied on vacation by their families, friends, or significant others but not by their business associates or colleagues. As a result, under the Flowers decision, the Service and the courts would likely deny that all or even a portion of the most common expenses that taxpayers incur while on vacation (e.g., transportation, lodging, meals, and entertainment) are deductible.

Nevertheless, Flowers does not preclude the deductibility of all expenses while away on vacation. While away on vacation, for example, a taxpayer might have a crisis back at the office requiring his full-time or significant attention.  In these limited instances, when the fundamental nature of the trip has been transformed from pleasure to business, there may be a justification to deduct many of the taxpayer's expenses while he is away from home. These occasions are likely to be rare, however, and the fact that a taxpayer, while on vacation, voluntarily chooses to spend even two to three hours daily checking her e-mail and/or reaching out to customers and clients does not fundamentally transform the nature of her trip to make it business-oriented.

The vast majority of vacationing taxpayers incur expenses first and foremost specifically to get away from their businesses. As a result, under the Flowers decision, the most common expenses that taxpayers incur while on vacation (e.g., transportation, lodging, meals, and entertainment) are likely nondeductible.