Deductions for Conventions Outside the U.S. and on Cruise Ships
This is the final post in a three part series that addressed tax issues of travel. Prior posts included deducting domestic and foreign travel and deducting travel expenses of a spouse. This post will focus on attending conventions outside the United States, including conventions on cruise ships.
To take a deduction, taxpayers must pass additional hurdles to show that the convention, seminar, or similar meeting outside North America or on a cruise ship directly relates to the conduct of their trade or business. The North American area includes the U.S., its possessions, the Pacific Islands Trust Territory, Canada, Mexico, and certain Caribbean countries.
Conventions, Generally
To deduct expenses of a convention outside the North America, the taxpayer must establish that it is reasonable for the meeting to be held outside North America. The reasonableness of the location includes factors such as:
- The purpose and activities of the meeting
- The sponsoring organization
- The residences of the organization’s active members
- The location of other meetings
In addition, the time spent in business meetings must be substantial when compared to the time spent sight-seeing and in other recreational activities; otherwise the trip will be considered a personal vacation and only the registration fees of the business meeting and other direct business expenses are deductible.
Example: Jethro, who lives in Michigan, is considering opening a business in Italy. He attends a 3 day seminar in Italy, organized by Italian accountants and attorneys, that explains the nuts and bolts of conducting business in Italy. Since the seminar’s purpose is to explain how to conduct business in Italy, and the seminar is sponsored by Italian business and legal professionals, it is reasonable for the seminar to be held outside North America. John can deduct his travel expenses to Italy, his lodging and meals, and incidentals. However, the time spent in the seminars must be substantial compared to his recreational activities in Italy or the travel expenses (with the exception of the seminar fees) will be nondeductible.
Example 2: Elly May is a successful attorney in Michigan. Her local bar association holds a convention in Paris that addresses legal practice in Michigan. It is probably not reasonable for a convention addressing Michigan law to be held in Paris. Therefore, her travel costs to Paris will not be deductible. However, she may take a deduction for the convention’s registration fees.
Conventions on Cruise Ships
Deductions for conventions on cruise ships are limited to $2,000 per person per year.
Additionally, deductions are allowed only if the ship is a U.S. registered vessel, and all of its ports of call are in the U.S. or its possessions. A taxpayer must also attach the following written information to her return for the year the deduction is claimed:
- A statement signed by the taxpayer showing the number of days of the trip, the number of hours each day spent attending scheduled business activities, and the program of the convention’s scheduled business activities
- A statement signed by an officer of the sponsoring organization that includes a schedule of each day’s business activities and the number of hours the taxpayer attended those meetings
Guess what? The IRS doesn’t like conventions on cruise ships!
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230
How to Deduct Travel Expenses
Travel expenses include transportation, lodging, meals, and related incidentals. Business travel expenses are fully deductible (except for meal expenses, which are 50% deductible). The travel expenses must be properly substantiated.
There are different rules for domestic and foreign travel. There are also different rules depending on whether the travel is exclusively for business, primarily for business, or primarily for personal reasons.
Domestic Travel
Exclusively for Business: If a taxpayer’s trip is solely for business reasons, all reasonable and necessary travel expenses (travel fares, lodging, transportation, meals, and incidentals) are fully deductible (except that meals are 50% deductible).
Primarily for Business: the deductible travel expenses include the costs of getting to and from the business destination and any business related expenses while at the business destination. Personal expenses incurred while at the destination are not deductible.
Primarily for Personal Reasons: the costs of getting to and from the destination are not deductible because they are considered personal expenses. However, any business costs the taxpayer pays at the destination will be deductible.
Whether the trip is primarily for business or personal reasons depends on the facts and circumstances of the travel. The IRS tends to focus on the amount of time spent on business and personal activities. The primary purpose of the trip is determined based on which purpose (business or personal) exceeds 50% of the time spent on the trip.
Example 1: Joan has a business in Detroit. She travels to L.A. for meetings that span four days. Joan arrives in L.A., spends four days in meetings, and immediately returns home to Detroit. She spent $500 in airfare, $800 in lodging, and $500 in food. Since, Joan’s trip is exclusively for business, Joan can claim travel expenses of $1,550 ($500 airfare, $800 lodging, and 50% of $500 food).
Example 2: Same facts as above except Joan spends three days site seeing throughout California. She spends $600 in lodging, $250 in meals, and $150 in auto expenses while site seeing. Since the primary purpose of her trip was business (based on 4 days of business versus 3 days personal), she may still deduct the $1,550 travel expenses from Example 1. However, the expenses for lodging ($600), meals ($250), and auto expenses ($150) she spent while site seeing are nondeductible personal expenses.
Example: Same facts as example 2 except Joan spends 6 days site seeing. Since the purpose of her trip is now considered personal (based on 4 days of business versus 6 days personal), the costs of getting to and from the destination are nondeductible. Thus, the $500 airfare to L.A. is no longer deductible. Her site seeing expenses are also not deductible. However, Joan may still deduct her business expenses while in L.A. ($800 in lodging and 50% of her $500 food expenses from example 1).
Foreign Travel
Exclusively for Business: If a taxpayer’s trip is solely for business reasons, all reasonable and necessary travel expenses (travel fares, lodging, transportation, meals, and incidentals) are fully deductible (except that meals are 50% deductible).
Majority of Time on Business: ALL travel expenses are allocated between deductible business expenses and nondeductible personal expenses. The expenses should be allocated to deductible and nondeductible categories using a day-to-day allocation method based on business days and personal days. There are two things to take note of:
- This differs from the domestic travel rules where the costs of getting to and from and destination are fully deductible if the trip is primarily for business. For foreign travel, the costs of getting to and from the destination must be allocated if the trip is not exclusively for business, even though the majority of time is spent on business
- ALL travel expenses (not just getting to and from the destination) must be allocated
Majority of Time for Personal Reasons: ALL travel expenses (costs of getting to and from the destination, lodging, meals, etc.) are not deductible because they are considered personal expenses. However, any expenses that the taxpayer pays at the destination will be deductible if they are directly related to business.
While the foreign travel rules require an allocation of expenses if business travel is combined with personal travel, there is a safe harbor. If the primary purpose of the trip was business AND any of the following exceptions is met, allocation of travel expenses is not required–the trip is treated as being exclusively for business (and 100% of the travel costs are deductible):
- No more than seven consecutive days are spent outside the U.S.
- Less than 25% of the total time on the trip is devoted to nonbusiness activities
- The taxpayer has no substantial control over arranging the trip—a self employed taxpayer is generally considered to have substantial control over his travel and won’t qualify under this exception. Employees may qualify under this exception.
- The taxpayer establishes through a facts and circumstances analysis that personal vacation was not a major consideration.
Comments or questions about this post? Please let us know through the comment area below!
If you found this article informative, subscribe to our Tax Newsletter.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230
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