Can I deduct my Cruise as a Travel Agent? This is one of the more common questions asked to me by Travel Agents. As with most every tax question, the answer is, it depends. In this article, I am going to cover three common scenarios, my opinions on the matter and the resources I used to formulate my position.
The 3 topics we will discuss are:
Conventions, seminars, or similar meetings on cruise ships
Cruise ships as a mode of transportation
Other cruise scenarios
Conventions, Seminars, or Similar Meetings on Cruise Ships
In 1982, lawmakers were trying to help the United States cruise ship industry by essentially outlawing all cruise ship conventions, seminars, and similar meetings other than those on ships registered in the United States, and, where all ports of call are in the United States or in the possessions of the United States. The initial idea was, by pushing business to US registered cruise ships, the US cruise industry would grow. Looking back, we can see that it didn't exactly go as planned. As a Travel Agent, you know that these two things really limit the number of ships out there. There are very few cruise ships registered in the United States and even fewer with routes that only have ports of call in the United States.
That 1982 law remains on the books and it has not been adjusted for inflation or changed in any way since that day.
Publication 463 which outlines Travel, Gift and Car Expenses specifically states;
“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.”
The convention, seminar, or meeting is directly related to the active conduct of your trade or business.
The cruise ship is a vessel registered in the United States.
All of the cruise ship's ports of call are in the United States or in territories of the United States.
You attach to your return a written statement signed by you that includes information about:
The total days of the trip (not including the days of transportation to and from the cruise ship port).
The number of hours each day that you devoted to scheduled business activities, and
A program of the scheduled business activities of the meeting.
You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes:
A schedule of the business activities of each day of the meeting, and
The number of hours you attended the scheduled business activities.
As a Travel Agent, it is likely that you would easily be able to meet the requirements of line items 1, 4 and 5. However, the likelihood you can meet the requirements of line items 2 and 3 is very minimal in my opinion. As the law is written, you must meet ALL of the items, not just most of them.
It is important to remember that these laws and IRS regulations were put in place for a specific reason and do not consider an individual business or provide any exceptions for Travel Agents. There is always the possibility that one day somebody will be audited, take it to tax court and win, but until that day I must keep my opinion in line with the current law and IRS publication as I am unaware of any such instance to date.
I understand, you probably hate me now, but just know I am on your side. I do think that things like seminars at sea should be considered an ordinary and necessary tax-deductible business expense for Travel Agents. But, when it comes to the IRS, my opinion means nothing. If you feel the same way, my recommendation is that you reach out to your lobbying organization like ASTA or your state representative to try and make some change.
Now, this doesn’t mean that there are NO situations where a cruise can be a deductible as a business expense. There are some options which we will be covering next.
Cruise Ships as a Mode of Transportation
Lawmakers allow you to deduct the cost of boat travel as a mode of transportation as a business expense, even if your boat is a cruise ship. Stick with me here because there are some rules you must follow.
There is an upper limit you can deduct each day which can be found in Publication 463 under “Luxury Water Travel”. The good news is, the dollar amount listed is per day and is typically sufficient to cover all but the most expensive cruise line. Publication 463 even gives an example that involves a Travel Agent!
You need to understand that the cruise itself is not the business destination or activity. The cruise is simply your mode of transportation to your business destination. Just like you are not deducting the cost of a flight because you are experiencing an airplane, you are deducting the cost of your flight because it is your mode of transportation to your business destination.
So how does this work in the real world?
Example: You have a five day conference (on land) in Barcelona, Spain. This conference is related directly to your business, and you will be spending the majority of your time attending the conference each day. Instead of flying from Miami to Spain, you decide to take a cruise as your mode of transportation. Your cost for the 6-day cruise was $3,500. You check the per diem rate for luxury water travel during your travel dates and find that you can deduct up to $796 per day. Six days multiplied by $796 is $4,776. This is more than the cost of your cruise, so you are able to deduct the full actual expense of the cruise, $3,500.
Keep in mind the per diem rates change each year and during the year so you should check the most recent rates for the year and dates of your travel. There are a couple more things to consider when utilizing this method.
Reasonably Direct Route
Your transportation must be reasonably direct. This means that the IRS considers what a reasonable time would be for a cruise to leave your origin and reach its destination. If, in the example above, you instead took a two-week cruise that had some ports of call in the Mediterranean before ending in Spain, those extra days would be considered personal days.
Meals
Normally, the cost of meals is built into the cost of the cruise. In that case, it's good news for you and you do not need to separate out the costs. If however, the meals/food/drinks etc are listed separately, you are only able to take a 50% deduction of those expenses similar to how you would for any other meal expenses. Usually things like specialty restaurants, drinks etc, are listed separately and would only qualify for the 50% meal deduction.
Foreign Travel Limits
Publication 463 discusses Foreign Travel Limits and how and when you would need to prorate your travel transportation expense. I encourage you to read and understand that document, however, I will give you some basics.
You can deduct the full cost of your transportation if:
Your business trip is less than one week, excluding the day of departure, or
At least 75% of your trip days count as business days (for trips longer than one week) (see business days later in the article)
In our example above, we had a five day conference as well as six days of reasonably direct transportation. Therefore, we do not meet the requirement of line item 1 above, but we do meet the requirement of line item 2 since 100% of our days were business related. If we did not meet either of the line items listed above, we would need to prorate our transportation expenses based on the ratio of personal and business days. Always remember that personal days are never deductible.
Other Cruise Scenarios
Other cruise scenarios are not quite as clear cut. It is easy as a Travel Agent to tell yourself that all your travel is business related. You might even have a point in that these trips provide you the knowledge needed to grow your business, but it doesn’t matter what you or I have to say, it matters what the IRS and tax court has to say.
When it comes to all other scenarios, we must fall back on ordinary and necessary business expenses, Publication 463, Foreign Travel, US Travel and what the IRS considers a business day.
Tax law says your travel expenses must be ordinary and necessary for you to claim a deduction. “Ordinary” is something that is customary and usual within your business community. “Necessary is something that is appropriate and helpful to your business. To prove the appropriate and helpful part, you need to be able to demonstrate that you incurred the expense for an intended business benefit and in the pursuit of profit.
Initially, the IRS will see cruise travel and other travel in general as a personal expense. The burden to prove that it is a business expense is on you. Taking some photos, walking around the ship, making a video or two and then saying that your entire cruise was a business expense and that all your days were business related is likely not going to fly with the IRS. If you don’t believe me, you can check out this court case where the travel agent's inability to explain how her travel was business related, and her lack of documentation resulted in a hefty tax bill and penalties.
The best way I have found to demonstrate this is by using the IRS definition of a business day. Understanding business days is important to determining how much of your travel is deductible and a business expense. While there are things such as weekends, holidays, circumstances beyond your control and transportation days (discussed above). The two that apply to this discussion are days where your presence is required and days that are primarily business. Let's look at each.
Days when your presence is required:
If your presence is required at a specific place for a specific and bona fide business purpose, that day is a business day regardless of the time spent on business.
Example: Your Host Agency requires you to attend a two hour in person training and complete the signing of onboarding documents at their office. You travel to that location, do the training, sign the paperwork and leave. While you only spent two hours on business related activities, your entire day is considered business related since your presence is required.
You need to be honest with yourself about “required”. I look at required as if you were not present, things could have not gone forward without you.
Days that are primarily business:
If your principal activity during working hours is the pursuit of your trade or business, count the day as a business day. Under this rule, if eight hours is the appropriate length of a workday, you should work over four hours to qualify as a business day.
The four hours of work should be directly related to your presence on the ship. If your work on the ship could have been done from your home office, then it shouldn’t be counted toward those hours. Answering emails, sending email, texting clients, editing videos and pictures are all things that can be done elsewhere. You don’t need to be on the ship to complete these tasks. Touring the ship, taking pictures and videos, meeting with sales or other staff are all things that require you to be on the ship. But do these things constitute your principal activity for the day? Only you can answer that question.
The IRS states; Taxpayers may deduct expenses incurred while traveling away from home if the trip is primarily to obtain education that has the requisite relation to the taxpayer's business. Sec. 1.162-5(e)(1), Income Tax Regs. If as an incident of such a trip the taxpayer engages in some personal activity such as "sightseeing, social visiting, or entertaining, or other recreation", the portion of the expenses attributable to such personal activities is not deductible pursuant to section 262.
In my humble opinion, I do think that in many scenarios you can likely justify a day or two of conducting business as your principal activity on the ship if you focus these activities in a single day or two. But to say that every day of your cruise your principal activity was business related is, in my opinion, after being on many cruises with my Wife, who is a Travel Agent, a bit of a stretch. The most likely scenario is that you will be pro-rating your business expenses between business and personal days. Spend a day or two working, documenting and keeping great records and sit back, relax and enjoy the rest of the cruise as personal days.
Summary
Most Travel Agents will never be audited by the IRS. Many Agents will disagree with what I have said, stretch the truth, or simply not care what myself or the IRS regulations have to say. That’s okay with me. I can only provide this information to you based on my research, tax court cases and my interpretation of the IRS regulations and publications. Should additional court cases or IRS guidance on these issues be brought to light I will gladly relook at my position.
However, making blanket statements such as “I’m always working when I travel”, “taking the cruise helps me sell the cruise” or classifying something as “research travel” will likely not be sufficient evidence to prove the business expense and most importantly the business purpose of your cruise.
Section 274(d) disallows deductions for traveling expenses, including meals and lodging, unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement (sec. 1.274-5T(b)(2)):
(1) the amounts of such expenses,
(2) the time and place such expenses were incurred, and
(3) the business purpose for which such expenses were incurred.
Adequate records must be written and must be prepared or maintained such that a record of each element of an expenditure is made at or near the time of the expenditure when the taxpayer has full present knowledge of each element.
If you take anything away from this article, just know that the most important aspect of taking a tax deduction for business related travel is first understanding and acknowledging what the tax courts and IRS regulations say. Once you understand the rules that have been put in place, you can use this knowledge to your advantage to take these tax deductions while staying within the law. Even if you do all these things, it is for nothing if you don’t document, document, document.
Enjoy your personal days and document your business days.
Remember, the burden of proof is on you!
Andrew Roed, EA
Taxes For Travel Agents, LLC
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