Cruising to a write off - Molen & Associates

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Cruising to a write off

How to cruise a write off? First things first, let’s remember our general rules that before we can deduct a business expense it must be ORDINARY and NECESSARY, meaning “An ordinary expense means it’s typical in your business, both [in terms of] amount [as well as in] frequency and purpose. Necessary means it helps you increase your profits or expand your business. Our Team will guide you, please continue reading below.

Cruise Ships

You can deduct up to $2,000 per year of your expenses of attending conventions, seminars, or similar meetings held on cruise ships. All ships that sail are considered cruise ships.

You can deduct these expenses only if all of the following requirements are met.

  1. The convention, seminar, or meeting is directly related to the active conduct of your trade or business.
  2. The cruise ship is a vessel registered in the United States.
  3. All of the cruise ship’s ports of call are in the United States or in territories of the United States.
  4. You attach to your return a written statement signed by you that includes information about:
    1. The total days of the trip (not including the days of transportation to and from the cruise ship port),
    2. The number of hours each day that you devoted to scheduled business activities, and
    3. A program of the scheduled business activities of the meeting.
  5. You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes:
    1. A schedule of the business activities of each day of the meeting, and
    2. The number of hours you attended the scheduled business activities. 

Rule #1

  1. You need to be able to show that the convention, meetings, or workshop onboard the Cruise ship directly benefited your business. The days that have a ‘business function’ would be deductible…the days of vacationing or relaxing wouldn’t be a tax write-off.

Rule #2

  1. With really no questions asked, the IRS allows taxpayers to deduct up to $2,000 a year is allowed for attending cruise ship conventions or business trips IF all the ports of call are in the U.S. or U.S. possessions and if the ship is registered in the U.S. (Good luck! Only certain cruise lines going to Alaska would be generally possible). Moreover, a $2,000 deduction may not be enough to cover the cost of a luxury cruise ship.

Rule #3

  1. If the ports are outside the U.S., the best option is to consider the ‘per diem rule’ that allows you to deduct up to 2x the maximum federal per diem rate, per day, on the Cruise. This may not seem like much, but for example, in 2021, the maximum federal per diem rate was $367. Thus, if you were on a cruise for 7 days. The deduction per person would be $367 x 2 x 7, equaling $5,138. (again, being able to show that every day on the cruise had a functional business purpose).

Rule #4

  1. Remember, the cost of travel to get to the Cruise is a different cost all together. It can be considered a separate expense to travel to the Cruise ship convention in the first place.

Rule #5

  1. Also, the cost of the actual education on the Cruise ship (not the cost of the Cruise) should easily be a deduction if it is directly benefiting your business. If worse comes to worst and we can’t deduct the Cruise ship costs, we have a ‘fallback’ position to at least deduct the education or workshop fees.

Rule #6

  1. Assuming the cruise qualifies for a write-off, food and beverage costs are also 100% deductible in 2021 and 2022. Of course, dinings expenses would be separately stated from travel expense for the Cruise or convention statement/invoice. 

Conners Additions

  • If your cruise exceeds a week, you are still eligible to deduct the cost of the cruise as long as your nonbusiness activity does not constitute 25% or more of travel time. 
  • The law hasn’t changed since 1982
  • In 1982 law stated that you could deduct no more than $2,000 of the expenses incurred by business events held on a cruise ship
  • My wife and I operate our business as an S corporation. We are thinking of having our stockholders’ meeting in Mexico and taking a cruise ship to and from the meeting destination. Will this trip be deductible?
  • Yes, but only after we make a couple of changes and add some clarity to this trip.  First, we want to change the reason for your trip from “stockholders’ meeting” to “directors’ and officers’ meeting.”  As a stockholder, you are an investor, and since investment seminars and meetings are not deductible, you do not want to travel to a stockholders’ meeting.  Instead, you are going to have a directors’ and officers’ planning meeting. Directors govern the corporation, and officers manage the corporation. Since you and your wife are both directors and officers, this planning meeting is a strong start to your deductible trip.  But it could be better.
  • As an aside, here’s something to think about: a business reason that we have long liked for a trip to Mexico is to attend an educational program that improves or maintains the skills you need in your business.
  • Because Mexico is in the tax law–defined North American area, the law says that you need no stronger business reason to deduct your trip to Mexico than you need to deduct a trip to Chicago, Illinois, or Scottsdale, Arizona.
  • Your trip to Mexico must meet the ordinary and necessary standard.  Qualified education is ordinary and necessary.  For your directors’ and officers’ meeting, which will address management and planning, your ordinary and necessary business reason could be as simple as needing to leave town so that the ordinary daily claims on your time do not interfere with your planning. The court accepted this “get away from the daily stuff” rationale as an ordinary and necessary business reason in the Heineman case.  In this case, the court allowed Mr. Heineman, the chief executive officer of a Chicago corporation, to deduct a $250,000 office that he constructed at his family’s summer home in Wisconsin for his one-month-a-year business
    planning session away from the Chicago office.
  • The next thing you must do is to get off the boat for the meeting. If you have the meeting on the cruise ship, you will lose the cost of the cruise as a deduction.  Thus, you want the meeting to take place on land, and the ship to be the mode of transportation to and/or from the meeting (you can use an airplane for one leg of the trip or for the entire trip).  For the on-land meeting, look for an office building or hotel that rents offices or boardrooms by the day.
  • Travel Rules to Consider  Less-than-one-week rule. If your trip is outside the 50 states but inside the North American area, and if the trip is for seven or fewer days (excluding the day of departure), then the law allows you to deduct the entire cost of travel to and from this business destination.  Mexico fits this location rule.  Cruise ship transportation. The law authorizes any type of transportation to and from your travel destination, so long as it is not lavish or extravagant. The cruise ship cost is not a lavish or extravagant expense, as the law precludes this possibility by placing luxury water limits on this type of travel.  The daily luxury water limit is twice the highest federal per diem rate allowable at the time of your travel.

Luxury Water Travel

If you travel by ocean liner, cruise ship, or other form of luxury water transportation for business purposes, there is a daily limit on the amount you can deduct. The limit is twice the highest federal per diem rate allowable at the time of your travel. (Generally, the federal per diem is the amount paid to federal government employees for daily living expenses when they travel away from home within the United States for business purposes.)

Daily limit on luxury water travel

The highest federal per diem rate allowed and the daily limit for luxury water travel in 2022 are shown in the following table.

 

2022 Dates

Highest Federal Per Diem

Daily Limit on Luxury Water Travel

 

January 1 – March 31

$497

$994

 

April 1 – April 30

373

746

 

May 1– May 31

360

720

 

June 1 – September 30

433

866

 

October 1 – October 31

388

776

 

November 1 – November 30

367

734

 

December 1 – December 31

564

1,128

Example

You are a travel agent and traveled by ocean liner from New York to London, England, on business in May. Your expense for the 6-day cruise was $6,200. Your deduction for the cruise can’t exceed $4,320 (6 days × $720 daily limit).

Meals and entertainment

If your expenses for luxury water travel include separately stated amounts for meals or entertainment, those amounts are subject to the 50% limit on non-entertainment-related meals and entertainment before you apply the daily limit. For a discussion of the 50% Limit, see chapter 2.

Example

In the previous example, your luxury water travel had a total cost of $6,200. Of that amount, $3,700 was separately stated as non-entertainment-related meals and $1,000 was separately stated as entertainment. Considering that you are self-employed, you aren’t reimbursed for any of your travel expenses. You figure your deductible travel expenses as follows.

Entertainment

$1,000

 

0% limit

x 0.00

 

Allowable entertainment

 

$0.00

Non-entertainment-related meals

$3,700

 

50% limit

× 0.50

 

Allowable non-entertainment meals & entertainment

$1,850

 

Other travel expenses

+ 1,500

 

Allowable cost before the daily limit

$3,350

Daily limit for May 2022

$ 720

 

Times number of days

× 6

 

Maximum luxury water travel

 

 

deduction

$4,320

Amount of allowable deduction

$3,350

Your deduction for your cruise is limited to $3,350, even though the limit on luxury water travel is higher.

Not separately stated.

If your meal or entertainment charges aren’t separately stated or aren’t clearly identifiable, you don’t have to allocate any portion of the total charge to meals or entertainment.

Exceptions

The daily limit on luxury water travel (discussed earlier) doesn’t apply to expenses you have to attend a convention, seminar, or meeting on board a cruise ship. See Cruise Ships, later, under Conventions.

Conventions

You can deduct your travel expenses when you attend a convention if you can show that your attendance benefits your trade or business. You can’t deduct the travel expenses for your family.

If the convention is for investment, political, social, or other purposes unrelated to your trade or business, you can’t deduct the expenses.

Your appointment or election as a delegate doesn’t, in itself, determine whether you can deduct travel expenses. You can deduct your travel expenses only if your attendance is connected to your own trade or business..

Convention agenda

The convention agenda or program generally shows the purpose of the convention. You can show your attendance at the convention benefits your trade or business by comparing the agenda with the official duties and responsibilities of your position. The agenda doesn’t have to deal specifically with your official duties and responsibilities; it will be enough if the agenda is so related to your position that it shows your attendance was for business purposes.

Conventions Held Outside the North American Area

You can’t deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless:

  • The meeting is directly related to the active conduct of your trade or business, and
  • It is as reasonable to hold the meeting outside the North American area as within the North American area. See Reasonableness test, later.

If the meeting meets these requirements, you must also satisfy the rules for deducting expenses for business trips in general, discussed earlier under Travel Outside the United States.

North American area

The North American area includes the following locations.

American Samoa

Jarvis Island

Antigua and Barbuda

Johnston Island

Aruba

Kingman Reef

Bahamas

Marshall Islands

Baker Island

Mexico

Barbados

Micronesia

Bermuda

Midway Islands

Canada

Northern Mariana

Costa Rica

Islands

Curaçao

Palau

Dominica

Palmyra Atoll

Dominican Republic

Panama

Grenada

Puerto Rico

Guam

Saint Lucia

Guyana

Trinidad and Tobago

Honduras

USA

Howland Island

U.S. Virgin Islands

Jamaica

Wake Island

The North American area also includes U.S. islands, cays, and reefs that are territories of the United States and not part of the 50 states or the District of Columbia. See Revenue Ruling 2016-16, available at IRS, for more information.

 

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