Many taxpayers may think a Cruise ship is a great place to have their next “annual company meeting” and take a tax write-off for some education.
However, if you have 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 Cruse ship.
The reason being is that Cruise ships are difficult to deduct for valid business travel. The IRS has passed strict rules on their deductibility. Essentially, the IRS scrutinizes deductions claimed for attending a business convention where opportunities exist for vacationing. They don’t believe you’ll actually stay in the ballroom at the bottom of the ship all day when you could be lounging by the pool, practicing your putting on the miniature golf course on deck, or practicing your skills in the wave pool.
Now with that said, I still want my clients and students to maximize their deductions whenever possible and 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 on board 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 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 2012, 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 worse and we can’t deduct the Cruise ship costs, we have a ‘fall back’ position to at least deduct the education or workshop fees.
6. As usual, food and beverage costs are subject to the 50% cost limitation and will apply if these expenses are separately stated in the Cruise or convention statement/invoice.
Obviously, the trick is to consider the quality of the cruise and it’s 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 deduction.
I typically recommend that client’s 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, consider a ‘resort’ or a land trip to a workshop. Bottom line, meet with your CPA before you pay for the Cruise tickets if you are trying to get a deduction. Here’s a link to a great Radio Show where I discuss your options for deducting your travel: http://bit.ly/18gvZk6
* To sign up for Mark’s weekly Free E-Newsletter and receive his Free E-Book “The Top 10 Best Tax Saving Secrets Everyone Should Know” visit www.markjkohler.com.
Mark J. Kohler is a CPA, Attorney, co-host of the Radio Show “Refresh Your Wealth” and 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 firm K&E CPAs, LLP.