**This
information is not intended as tax advice and CEALS-Meetings on Ships does not
offer tax advice. While these are some general guidelines and suggestions, we
strongly encourage you to discuss this matter with your tax advisor as every
company has different circumstances and needs. Tax laws, rules and regulations
change regularly, and no representation is made that this is the most current
information available. **
Over the past several years, there has
been an explosion in the popularity of conducting business meetings and
conferences at sea on cruise ships. Indeed, the cruise industry has responded
by building cruise ships with meeting and conference facilities that rival land-based
venues. The cost efficiency of meetings at sea versus land-based venues has
caused the meetings at sea business to soar.
The dollar differences can be substantial when considering all of the
inclusions in a cruise ship meeting package that you typically pay extra for at
a land-based venue. On a cruise ship, your meals (all you can eat) and onboard
entertainment, meeting rooms and AV equipment are included in your cruise fare.
This makes the price very reasonable compared to separately paying for items on
a land-based venue. Furthermore, because
these items are not separately stated, it makes them 100 % deductible versus
50% deductible when listed separately at a land-based venue.
IRS Code subsection 274 (h) provides
specific guidelines with respect to the deductibility of foreign country
meetings (which include foreign flagged cruise ships). Under these guidelines,
no deduction is allowed for expenses allocable to a meeting held outside the
North American area, unless the taxpayer establishes that the meeting was
directly related to the active conduct of his or her trade or business and that
after consideration of various relevant factors, it was -as reasonable- for the
meeting to be held outside the North America area within it. If a meeting
program is held within North America than the meeting can be tax
deductible. The term "North America
area" refers to the United States, its possessions (Puerto Rico, Guam and
the U.S Virgin Islands), the Trust Territory of the Pacific Islands, Canada and
Mexico.
If the meeting program is held on a
Foreign Flagged Cruise Ship, then the meeting is normally not deductible by the
company. There are however, two scenarios for dealing with this rule in a way
that meets IRS regulation which is discussed below.
- · American Registered and Flagged Ships
- · Tax Advantages of Cruises in Hawaii
- · Tax Deductibility of Incentive Programs on Cruise Ships
- · Tax Issues Related to Meetings on Ships
- · Tax Deductibility of Business Meetings Only
- · Alternatives for Tax Considerations
In deciding whether to conduct a meeting
at sea on a cruise ship, some questions a business needs to consider are:
1. What type of venue will attract a
larger audience and leave participants feeling energized and,
2. Which venue will provide greater
value to both the conference organizer and attendees in terms of both
investment and quality?
3. Is the decision driven by a tax
deduction for the event?
The first rule of thumb is that a good
business decision should always be made on the basis of what makes the most
economic sense for the company. If a tax deduction sounds appealing, it is
important to make sure the benefit of any deduction exceeds the costs of not
taking the deduction. The large and growing number of meetings at sea on cruise
ships clearly illustrates that many companies have found the benefits and costs
savings significantly outweigh the potential tax deduction and elect ships over
land-based venues.
Today, companies have choices in the
cruise ships they select for their meeting. American flagged vessels have
several distinct tax advantages over vessels flagged in foreign nations.
Unfortunately, most of the cruise ship fleet today remains flagged in foreign
nations and the only American flagged ships operate in Hawaii. There are,
however, some effective ways of dealing with this issue on foreign flagged
vessels as discussed below entitled “Gross Up Cost” and “Net vs. Net Costs”.
US Based Companies, organizations and
Individuals attending meetings on foreign flagged cruise ships should be aware
of certain IRS Regulations so that they can maximize the tax deductibility of
the trip.
What
about cruises?
For "pure" incentive travel
arrangements, cruises present no special problem. Business travel on cruise
ships can be deductible, subject to general business travel rules. For
conventions/seminars/meetings, travel is deductible if the taxpayer establishes
that:
1) The meeting is directly related to
his or her trade or business.
2) The ship is of U.S. registry and
makes all of its ports of call in the U.S. or its possessions;
3) The taxpayer attaches to his or her
tax return: a statement detailing the number of days of the trip and the number
of hours devoted each day to business; a statement signed by an officer of the
sponsoring organization verifying the above information
As a general rule, certain travel and
entertainment expenses incurred by individuals (that the company does not pay
for) may be deducted from gross income for federal tax purposes when
Tax Issues Related to Meetings on
Ships
those expenses are incurred in the
pursuit of a trade or business. Section 162 (a) of the IRS Code provides the basis
for those deductions. It states in part: there shall not be allowed as a
deduction all of the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade and business, including ... (2)
traveling expenses (including amounts expended for meals and lodging other than
amounts that are lavish or extravagant under the circumstances) while away from
home in the pursuit of a trade or business. There are, however, two scenarios
for dealing with this rule in a way that meets IRS regulations. These are:
GROSS
UP COSTS
* Grossing up the cost is a calculation
that can be used if the company would like to be able to write off the cost of
the meeting even if the meeting does not qualify under IRS rules.
* The meeting can be treated like an
incentive and charge the attendee with the fair market value of the cruise with
the form 1099. Then the employee will
have to pay personal taxes based on the amount of the cruise charged on the
1099 form. The company will then
reimburse the meeting participant the additional taxes the participant will
incur due to the 1099 form. (Example--based on the cost of the cruise being
$1,000 per person...and let's say that the individual's employee tax bracket is
30%...the employee will receive a check for $300.00 (from the company) to cover
the additional tax increase due to the fact that the participant filled out a
1099 form.)
* Using the "Gross Up Costs"
method the company can write off the entire $1300.00 ($1,000 for the cruise
plus $300 for the income expense to the employee). Which means the company can write off 100% of
the cruise! If the company was thinking about using a North American land-based resort, they can only write off 50% of the total cost of the land-based meeting
program.
When you compare the cost of the cruise
(calculate 100% of it as a write off under this scenario) vs. the cost of the
land-based resort (where only 50% of the total amount is a write off) and in
most cases the cruise program usually costs less, therefore making it a smart
business choice.
NET
VS NET COSTS
* Net vs. Net is another Calculation
that can be used to compare a North American land property that the meeting
would be eligible for tax deduction vs. a foreign flagged cruise ship.
* Compare the actual cost of the North
American land-based hotel that qualifies for a tax deduction (with the tax
deductions included in the calculations) Make sure you include all the costs
for functions (lodging, food, beverage, meeting facility rental charge, AV equipment
and entertainment) --remember that all costs are only a write off at 50% of
their value!
Compare the North American land based
program to the amount the total cost of the cruise (without the tax deductions)
in most cases, the cost of the cruise (without the tax advantage) usually comes
out less expensive than the cost of the North American land-based program (including
the 50% tax deductions)
DIFFERENCES
BETWEEN INCENTIVE TRAVEL AND MEETINGS
For
Pure Incentive Programs
* A 1099 form needs to be filled out by
the winner/company for incentive awards valued at $600.00 or more. Therefore, the winner is going to have to pay
taxes based on the value of the cruise.
(Keep in mind that the winner would have to pay taxes on the value of
merchandise also).
How
is incentive travel different from meetings?
"Pure" incentive travel
awards are given as a prize for reaching set goals. Recipients are typically
customers, employees, independent contractors, or service providers who have
met sales or purchase quotas or performance goals.
For tax purposes, pure incentive travel
is "pleasure travel awarded for a business purpose." That means the
sponsoring company can deduct the cost of the award (what the business actually
paid, regardless of fair market value), and the recipient must report the fair
market value of the award as income.
A meeting is defined as an event that
takes place primarily for the purposes of educating, motivating, and
communicating, without any need for recipients to perform. Meeting planners
should make sure they have documentation to prove that an event was indeed a
meeting, such as agendas, programs, and pre-meeting materials.
What
are the guidelines for "pure" incentive travel?
The crucial phrase in determining
deductibility of your incentive award is whether the program was "ordinary
and necessary." However, there is no clear standard of "ordinary and
necessary." If the award program benefits the sponsoring company (by
encouraging high performance), and the awards are not too lavish, the program
usually will be deemed an "ordinary and necessary" business
expense.
When
is an award too lavish?
In addition to the need for a
profitable business relationship between sponsor and recipient, the value of
the award must be in line with the value of the business benefit provided by
the customer, employee, or supplier. The award of a $5,000 cruise for a customer's
purchase of $200 worth of equipment, for example, would probably be seen as
"lavish and extravagant." A red flag might go up at the Internal
Revenue Service (IRS), which would most likely disallow the deduction.
If the IRS perceives the award as other
than furthering that business's interests, it will treat the award as a gift.
The giver is limited to a deduction of $75 per recipient per year, but the
recipient does not have to report the award as income.
What
records need to be kept?
The Treasury Department has clear
"substantiation and documentation" guidelines that should be
followed, particularly when the recipient is an employee. Awarding companies
should protect their deductions by maintaining an account book, a diary, or a
statement of expense. They should also retain canceled checks, credit card
slips, and hotel receipts. Records should reflect the amount of each
expenditure, times and places of travel, the business purpose of each
expenditure, and the recipient's business relationship to the awarding
company.
What
needs to be filed?
Awarding companies can protect their
deductions by filing the correct paperwork on recipients. For customers and
contractors/suppliers, that mean reporting any award that exceeds $600 in
value, provided the recipient is not a corporation. File form 1099 MISC, along
with Form 1096, by February 28 of the calendar year following the year in which
the award was made.
If the recipient is an employee, the
employer must declare the value of the award as compensation to the employee
and as wages for the purpose of withholding, using a W2 form. Recipients should
know that the full cash value of the award (including reimbursed expenses) will
be counted as gross income and should be entered on their 1040s.
What
if business and pleasure are mixed?
"When a trip is taken for the
purpose of business as opposed to pleasure, it is not a 'pure' incentive travel
situation," explains Jim Gossett, attorney for the Society of Incentive
Travel Executives (SITE). When a trip is made for both reasons, then it is a
matter of determining which purpose is dominant.
When it's a business trip, expenses to
and from the destination might not be counted as income to the traveler and may
be deductible under certain conditions. When it's pleasure, those expenses
would be counted as income. Other expenses can be divided into "primarily
business" or "primarily pleasure" categories and treated
accordingly.
When expenses are deemed necessary to
business and are not reimbursed by the employer, the IRS throws in a caveat: An
employee may deduct only the amount of total annual business expenses that
exceed 2% of his or her adjusted gross income. The amount of expenses below
that limit in not deductible.
What
if employees are reimbursed?
The 2 percent rule makes it important
for employees to seek reimbursement using a plan that conforms to IRS
guidelines. If the employer uses an "accountable reimbursement plan"
(employees must substantiate, according to IRS Code 274, each expense being
reimbursed), then reimbursed expenses are not counted as income, are not
reported as wages, and are not taxed.
When an employee does not substantiate
his or her expenses, reimbursed expenses are treated as income, must be
reported on the employee's W-2 form, and are subject to income taxes. The
employee can deduct these expenses as itemized miscellaneous deductions subject
to the 2% rule.
Are
there restrictions on per diems and mileage?
The Commissioner of the IRS has the
authority to establish standard mileage rates and per diem rates for business
travel. If you elect not to follow the guidelines, you are still allowed to
deduct your actual expenses, but you must substantiate each item. For more
information on per diems, call 800-829-1040 and ask for updates in Code Section
274 of IRS Publication 463.
What
about company personnel required on the trip?
When company personnel are required to
accompany recipients on a trip, their involvement is treated as a business
expense. However, the IRS loves to challenge these deductions.
What
about when spouses share in the award?
If the spouse of a recipient is
included in a "pure" incentive travel award, the value of the award
becomes part of the couple's income and can be fully deducted by the awarding
company. If the trip is for business, the cost may be nontaxable (as income)
for the recipient, but the spouse's expenses become nondeductible by the
recipient unless he or she can prove that the spouse's participation served a
"bona fide business purpose." The IRS recently changed the rules to
require that the spouse be an employee of the primary business traveler to
claim deductions.
Are
there special restrictions for foreign travel?
When a trip meets the requirements for
"pure" incentive travel, treat foreign travel as you would any other
incentive travel award. Problems arise when the trip is characterized as a
meeting. The IRS does not allow business deductions for travel to
conventions/seminars/meetings outside the "North American area," unless
it's proven that the meeting was directly related to the conduct of his or her
business.
