#23: Seas the Deduction: Business Travel on Cruises Explained
If you've considered attending a cruise that relates to your business-you won't want to miss this episode. Learn the ways you can and can't write off a cruise as a business expense.
Facebook Group for Tax Professionals
Facebook Group for Real Estate Investors
Facebook Group for Tax Professionals
Facebook Group for Real Estate Investors
[00:00:00] Welcome to Real Estate is Taxing, where we talk about all things real estate tax, and break down complex concepts into understandable, entertaining tax topics. My name is Natalie Kolodij, I'm your host, and I am so excited that you've decided to join me.
[00:00:23] Hello. Hello everyone. And welcome to this week's episode. The past several months, I have attended multiple conferences, tax conferences, real estate conferences, all across the country. Various venues. And it got me thinking about one of my favorite travel business topic. Overlaps. Which is when you can and when you can not. Deduct travel on a cruise ship.
[00:00:53] There's a lot of blogs and articles out there, but they're all fairly vague or they give very [00:01:00] generalized steps and don't really talk about the feasibility of it. Or actual examples of it. I spent some time today searching for some court cases related to this topic. And there really aren't any specific to cruise ship travel as its own deduction.
[00:01:19] I couldn't find it as a focus point of a case. I did find some court cases that were semi-related we'll chat about one of those at the end. But outside of that, there's not a ton of guidance because it's pretty cut and dry.
[00:01:34] The code section for this hasn't changed since 1982. So there haven't been any big updates or anything that really needed to be contested in recent years. So let's get into it. There are two different ways you can potentially write off a cruise as a business expense. Both of these are covered in code section [00:02:00] 2 74 M and they are split between addressing conventions on cruise ships. And then a secondary category known as luxury water travel. So starting off with conventions on cruise ships. This is something that I hear about pretty often. I think anyone in the tax industry and real estate in a lot of industries, There are multiple cruises per year related to most industries that you can choose to attend.
[00:02:33] It will be in most cases, a seven day cruise. They will buy a room block the same way they would for a conference at a hotel or a resort. And then everything takes place on the cruise. There are however many hours of education. There are, different conference related events and networking.
[00:02:51] They're renting out general speaking areas. And attendees pay for the room. And the cruise fare, it's all typically rolled [00:03:00] into one price. So these are marketed pretty frequently. And I have most often seen these marketed as a deductible business expense. But the truth of it is very rarely. Is a conference or an educational event on a cruise ship. Going to just easily be deductible. So let's start off with the first. Addressing of this.
[00:03:29] So let's look at how the code words, this. In the case of any individual who attends a convention, seminar, or other meeting, which is held on any cruise ship. No deduction shall be allowed under section 1 62 for expenses allocable to such meeting. Unless the taxpayer meets the requirements of paragraph five. And establishes that the meeting is directly related to the active [00:04:00] conduct of his or her trade or business. So code section 1 62. Is the part of the tax code that explains ordinary and necessary business expenses. As a starting point, attending a convention seminar, et cetera, on a cruise ship. Is only a business deduction. If it directly relates to the taxpayers ongoing trader business, that makes sense. Next part. Again, it is directly related to the active conduct of his or her trader business. And that, and then it goes on to list two requirements. Requirement number one, the cruise ship is a vessel that is registered in the United States. And requirement number two. All ports of call of that cruise ship are located in the United States or in possession of the United States.
[00:04:53] So when we just start off with looking at these two initial requirements, I will [00:05:00] let you guess how many cruise ships you think fit the bill? If we are looking at large commercial cruise lines. there's a thousand, 2000 people on board, maybe more. It normally is a week long, goes out to a few islands, go somewhere else. But we're not talking about like a river cruise or one of those little boats that'll fit like a hundred to 300 people, But one of those large commercial cruise ships, where there is a buffet and like a kid's club and water slides and all of that. One we're looking at that level of cruise ship. There is one. Singular ship that meets the requirement. Norwegian cruise lines, pride of America based in Hawaii is us registered. And it is the only large commercial cruise lines, cruise ship. That is us registered. Most cruise ships are registered to other countries for a variety of reasons. So just right off the bat, most cruise [00:06:00] ships are not going to meet this requirement. The vast majority of cruises and cruise ships do not check the boxes. To be able to write off a convention or seminar that is held on a cruise ship. If it did, let's say that. Your industry is hosting a cruise that goes to Hawaii on that pride of America cruise ship. So it is us registered and it is only going to the United States.
[00:06:28] then there is a $2,000 expense limit. For the total cost of that cruise with that seminar or convention. Total expense CAPTA, $2,000. In addition to that, if you happen to find a cruise that ticks all of the boxes and does qualify. To write off as a convention or an event that is held on a cruise ship. There's a whole bunch of reporting requirements that are required as [00:07:00] well. for the tax year where you're claiming that deduction. You also need to include. A written statement. Signed by the individual attending the meeting.
[00:07:10] That includes information about the trip, the total days that excludes the transport to, and from the cruise ship. The number of hours each day of the trip where you devoted to only business activities. You need to include a program or schedule for all of the business activities or meetings. And any other information that might be required by the secretary.
[00:07:36] Additionally, you also need to include. A written statement signed by an officer of the organization or group sponsoring the meeting or the conference. And that has to include. A schedule of the business activities for each day, the number of hours, which you attended those business activity. And any other [00:08:00] information as might be required by the secretary. so for the amount that we are fed and marketed cruises that are a tax deduction and attending these seminars on a cruise that are going to be a write off, they're likely not going to be. And in the rare event, they are. They're a huge pain in the ass to include everything you need to on your tax return to claim that deduction. So that's not a very likely option.
[00:08:27] It's not my favorite option. But that's what we have for the availability of writing off a convention or a seminar that is specifically held on a cruise ship.
[00:08:39] The next option that I think is the far better choice. Is looking at your crews under the definition of luxury water travel. So at this means. Is instead of trying to attend an event or a conference, et cetera, on a cruise. Your [00:09:00] crews is going to be your mode of transportation from your starting point. To the other city or location where the conference or seminar is being held. So the actual event is not on the ship.
[00:09:14] The ship is just how you are getting there. Instead of flying or driving or taking a train, et cetera. So luxury water travel has a whole set of rules of its own. As a starting point. There is a limit on the amount of deduction, but in this case, it is limited to twice the federal per diem rate. For similar travel.
[00:09:40] So for the prior tax year for 2023, it varies between quarters and months. So the highest federal per diem for the month of January of 2023. Was $564 per day. So for a cruise for luxury water travel, that would [00:10:00] be double that. Which would be $1,128.
[00:10:04] So you would be able to write off up to $1,128 per day. Of luxury water travel. There's a few other nuances that come into play. Of course. If the cruise has separately stated meals. That's limited to your same standard, 50%. This isn't really common with cruises, but sometimes you can purchase like an additional meal package, something like that. And these limitations would come into play. So as you can see, there are two very different methods. For potentially being able to write off a cruise as a business expense. Now, something that I have heard people suggest is that if you are going to a seminar or a conference that is on a cruise, And if it goes to any ports that are outside of the U S. But it's a [00:11:00] us registered ship, which is still a really, really unlikely. But they suggest you use this daily per diem instead. And that doesn't work. It specifically lists that there is an exception to this luxury travel daily per diem method. That you can not apply it to any expense that is applicable to a convention seminar or meeting on a cruise ship. Let's recap. Two different versions. Attending a seminar or conference on a cruise ship. Almost never going to be deductible. The ship has to be us registered and it can basically only go to us territories. If it happens to meet those two requirements, then the expenses kept a $2,000. Your other option of luxury water travel. Gives you a daily cap that is two times the federal per diem. But this would not apply to. A cruise where the conference or [00:12:00] event was on board. This would only apply if you were using the ship. To get from point a to the final destination where the conference or seminar was being held.It's also important to note. That in either of these cases, there might be. Some expense that is still deductible. If it is not tied into the direct cost of the cruise. For example, like in the circumstance where the conference or seminar is held on the cruise ship, even if that is not deductible your travel to the cruise port. And from it might still be deductible. If the organization structures it where the education is priced totally separate from the cruise fare.
[00:12:50] Those are two different things you pay for separately. The education might still be deductible as a standalone item. So there might be [00:13:00] some nuance to it that does allow you to still write off some things. But it's not super easy to write off any kind of a conference that is being held on the actual cruise ship. I think the better option is to use a cruise ship, to get from point a to point B. There are pretty often repositioning cruises. Where Cruz starts in one city and ends in another city. Some of these are even through the Panama canal.
[00:13:29] So if you were going from Florida where you live to a conference in California, then you could take a cruise from one place to the otherAnd potentially have that be a deductible expense to your business.
[00:13:42] As I mentioned at the beginning of the episode, I did try to find some court cases, some memos, some more interesting information related to. This specific event of attending. Conferences held on cruise ships and I couldn't find one. [00:14:00] So if you've got a court case or something, you've come across, please feel free to send it to me. But one of the more interesting ones I did come across. Was a tax court memo from 1998. And this memo related to someone who did attend a seminar, held on a cruise ship. So in 1993, this taxpayer attended the second annual seminar at sea. and this was held a board of Royal princess cruise line. And this ship went from England and sailed to several different ports in Scandinavia and Russia. It was originally set up to be an educational seminar that was hosted by experts in the field of travel. So it was designed to help you learn about travel writing and travel photography by two leading experts.
[00:14:57] One of the two experts was unable to attend [00:15:00] the cruise. And that really led to the overall amount of teaching and business purpose. Being pretty minimal. So this cruise was two weeks total and across the entirety of the cruise. There was only five and a half hours of any kind of formal instruction. And that was it for actual conference or seminar time on the cruise ship. So again, Wasn't likely deductible to start with because it was based on the premise of a conference or education on a cruise. But then even more.
[00:15:35] So the fact that there wasn't even two full days, like two full business purpose days of teaching. There was five and a half hours in total across the 14 days. Really hard argument to make that claim. The taxpayer originally indicated. That they signed up for the cruise for educational purposes. And that was the original intent. [00:16:00]
[00:16:00] However, they then said that they changed their thoughts on it and really shifted their mindset from it being an educational cruise. And then when the one expert dropped out. They looked at it as a way to focus on their photography skills and use it as an opportunity to take over 900 photos between each of the ports they visited. But that still doesn't necessarily make that a deductible cruise. And all in all the total cost of the cruise. Including meals, airfare, and all of the land tours that they took was just over $12,000. As a result of the cruise to prove that this was a business related activity and income generated item. The taxpayer did publish one article related to the cruise and the travel. For which they were compensated $150. So in this court [00:17:00] case, the court noted that they were particularly influenced by the taxpayer's failure to consider. Whether the income they could generate from a particular trip. Would be an excess of the expenses related to the trip. They noted that in fact, the income producing potential of a trip didn't really seem to be of much concern to the taxpayer. They said it appears that the taxpayer would first decide on a destination and spend whatever amount they wanted to travel there. And they did not consider at all, if that would actually have any kind of income potential as a result. That was an afterthought. So not only was this cruise disallowed as a business expense. Most of their expenses were disallowed as a business expense. Because at the end of the day, they could not prove to the court. That they had a valid business motive where they were engaged in a for-profit activity. That was really the only case I could find on [00:18:00] this, but I do think it ties into something else we're seeing more and more of. Which is social media influencers telling people. That you can write off your vacations, become a travel blogger, take your kids to Disney, write a blog about it. Eventually you'll monetize it.
[00:18:17] And then you'll be an Amazon affiliate and you'll make $4 this year. And, but you got to ride off all these trips. This court case is an excellent example of why you should not do that. There's pretty clear factors for when something is a business or a hobby. And it does get blurry when enjoyable things like traveling, start creating large sources of income. But unless you're already a regular journalist or someone who is being paid a significant amount for your monetized blog or your articles, et cetera. Assume it's a hobby until you can really show a profit motive.
[00:18:57] So just a little side note [00:19:00] on another common overlap with travel and business, write offs. So that's what I have for you guys this week. I know it didn't specifically relate to real estate. But it is something that comes up pretty often for real estate conferences and tax conferences and every other industry. So hopefully it helps someone from making a mistake and spending money on something that might not pass.
[00:19:23] If it's ever looked at under audit. If you have a court case or an example or something you've encountered related to cruise ships, specific tax deductions, please reach out to me and share it with me. I would love to hear about it. I myself am a big cruise enthusiast. I am getting ready. This upcoming winter. To do a transatlantic cruise.
[00:19:49] I'm pretty excited about that. So this was one of those areas that I dove into head first when I got into tax, because obviously what I wanted to [00:20:00] do was take every cruise I could and write it off. And it was incredibly disappointing to find out how unlikely that was. So I just wanted to share that disappointment with all of you guys. Not really, but kind of the purpose to share.
[00:20:15] It was so that you can avoid making a mistake and you now have the information you need. To decide if. A cruise or using a cruise ship to get to a conference or to a business event. I can result in a deduction for your business. So as always. If you guys found value in this episode, I would love if you would share it with someone, you know, someone else that you think would enjoy it. Leave a five star review.
[00:20:42] If you are so inclined. If you've got a good cruise ship tax-related court case or article or something, you've come across. Please. Please share it with me. I'll link below to my socials.
