I recently returned from a cruise. The first 7-day Royal Caribbean cruise since the disruption of 2020. I still had to wear masks here and there on the ship. At least the crowds were down and it was nice to be on a trip again. I just wish it would have been a tax write-off!
Many taxpayers may think a Cruise ship is a great place to have their next “annual company meeting.” They may also think they can take a tax write-off for some education. Don’t get your hopes up. The IRS crushed this travel expense as essentially ‘entertainment.’ At best, it’s a glorified business travel experience.
Have you noticed there aren’t many conventions and courses offered on Cruise ships anymore? In fact, I don’t hold my annual Tax and Legal Wealth Workshops on a Cruise ship. There’s a reason.
There still may be a partial tax write-off when done right
Now with that said, I still want my clients and students to maximize their deductions whenever possible. If you’re going on a Cruise with a ‘business purpose’, let’s talk about the rules.
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.
2. 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.
3. 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).
4. Remember, the cost of travel to get to the Cruise is a different cost all together and can be considered a separate expense to travel to the Cruise ship convention in the first place.
5. 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. So 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.
6. 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.
Obviously, the trick is to consider the quality of the cruise and its cost, compared to the per diem rates. Thus, the “low budget” cruise lines may not be a problem if you are trying to get a full tax write-off in most years.
As such, from a practical perspective, I typically recommend that clients use the Cruise as a great time to avoid business and take a nice relaxing trip.
If you want to get a write-off and maximize a deduction for travel, consider an ‘all inclusive resort’ or a trip to a workshop staying in a hotel. Bottom line, meet with your CPA before you pay for the Cruise tickets if you are trying to get a deduction.
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Mark J. Kohler is a CPA, Attorney, co-host of the Podcasts “Main Street Business” and the “Directed IRA Podcast“. He is the author of the new book “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP, and the accounting firmK&E CPAs, LLP.