Cruising for tax deductions? Try deducting your next Caribbean cruise

By William Brighenti, CPA

Has your wife been harping on you lately about all work and no play?  Is she an employee or a partner of your business (or, more likely, are you the employee)?  Why not consider a business cruise, allowing you to write off travel expenses as business tax deductions?  There's nothing like cruising to Antigua, Aruba, Barbados, Bermuda, Jamaica, Mexico, Puerto Rico, or the Virgin Islands, feeling a tropical breeze caressing your body, absorbing the soothing rays of the sun, sipping margaritas, and stealing glimpses of bikini clad shipmates while having Uncle Sam picking up a hefty share of the tab.  You deserve it, and your wife may love you for it.  Did I mention warm, sultry tropical nights?

Because of extensive abuses involving tax deductions of conventions or seminars on cruise ships, the regulations allowing their deduction as business travel expenses were tightened and limited a number of years ago. Presently you can only deduct up to $2,000 per year for each person attending conventions and seminars on cruise ships, and only if the cruise trip meets all of the following requirements:

  1. The convention, seminar, or meeting offered on the cruise ship must be directly related to your trade or business.
  2. The cruise ship must be a vessel registered in the United States.
  3. All of the cruise ship's ports of call are in the United States or in possessions of the United States.
  4. You must attach to your tax return a written statement signed by you that includes information about:
    1. The total days of the trip (not including the days of transportation to and from the cruise ship port),
    2. The number of hours each day that you devoted to scheduled business activities, and
    3. A program of the scheduled business activities of the meeting.
  5. You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes:
    1. A schedule of the business activities of each day of the meeting, and
    2. The number of hours you attended the scheduled business activities.
Accordingly, conventions and seminars offered on Caribbean cruises are not tax deductible since their ports of call fall outside the United States.  There is a way, however, to take a Caribbean cruise and deduct more than $2,000 in travel expenses:  simply find a convention or seminar held in any of the North American Areas sanctioned by the U.S. Department of State and travel there by cruise!  The North American area includes U.S. islands, cays, and reefs that are possessions of the United States and the locations listed below:

American Samoa
Grenada
Micronesia
Antigua and Barbuda
Guam
Midway Islands
Aruba
Guyana
Netherlands Antilles
Bahamas
Honduras
Northern Mariana Islands
Baker Island
Howland Island
Palau
Barbados
Jamaica
Palmyra Atoll
Bermuda
Jarvis Island
Puerto Rico
Canada
Johnston Island
Trinidad and Tobago
Costa Rica
Kingman Reef
USA
Dominica
Marshall Islands
U.S. Virgin Islands
Dominican Republic
Mexico
Wake Island
Under this tax stratagem there would be no need of restricting your travel on US vessels and to US ports of call, and of signing and of obtaining from the group sponsor detailed prescribed attest statements.  If your cruise does not exceed a week, simply attend a business related seminar or convention (even a one day event suffices for a one-week cruise), and you have satisfied the ordinary and necessary expense criteria of a qualified business tax deduction of your travel expenses.  Of course, on any business trip, document your business expenses by addressing the who, what, when, where, why questions, save receipts, and collect convention/seminar paraphernalia as IRS souvenirs.  If your cruise exceeds a week, you are still eligible to deduct the cost of the cruise as long as your nonbusiness activity does not constitute 25% or more of travel time. 

If you travel by ocean liner, cruise ship, or other form of luxury water transportation for business purposes, there is a daily limit on the amount you can deduct, based on the per diem rate available to federal government employees for daily living expenses when traveling away from home in the United States for business purposes:  the daily travel deduction limit on a cruise is stipulated as twice the highest federal per diem rate allowable at the time of your travel.  For the fourth quarter of 2009, the highest federal per diem rate is $411; consequently, the current daily limit for luxury cruise travel is $822 per person per day.  If your expenses for luxury water travel include separately stated amounts for meals or entertainment, those amounts are subject to the 50% limit on meals and entertainment before you apply the daily limit.  But if your meal or entertainment charges are not separately stated or are not clearly identifiable, you do not have to allocate any portion of the total charge to meals or entertainment.  Therefore, it would be tax wise to find a luxury cruise liner that does not separately break out meal and entertainment charges so you can deduct them fully; this should not be an overtaxing task.

If your wife requires a cruise longer than a week, you will need to find a convention or seminar constituting enough hours and days to fulfill the 75% business activity requirement for full deductibility of your business travel expenses.  However, if we examine closely what legally constitutes a business day, the 75% business requirement does not necessarily result in only one day of pleasure for every three days of drudgery.  A business day is any day where you devote more than half of your normal workday's length to business.  If your normal workday is 8 hours and you devote more than four hours to business, that partial day counts as a full workday.  Moreover, the IRS considers the amount of normal ship time to and from your destination as business days.  In addition, the Internal Revenue Service treats weekends intervening between days of business activity as business days, too.

For instance, if you were to depart from the United States on a cruise liner on a Monday to travel to a Caribbean island where a convention is being held, were to arrive there on Tuesday, and were to devote at least a little over half of your normal working day at the convention on Wednesday, Thursday, Friday, Monday, and Tuesday (the convention not being open over the weekend), you may have accumulated eleven business days, if you were to include the two days to return home and the weekend as business days.  If you were to spend then three additional days at the island's beaches, before returning home on the cruise liner, you possibly transformed a largely non-deductible two week trip into a legitimate tax deductible business travel expense of as much as $11,508 ($23,016, if your spouse were to qualify) simply by devoting a little more than twenty hours evenly spread over five days at a convention.  The same would hold true for an educational seminar, as long as it lasts at least six hours each day and you are in attendance for at least two-thirds of each class.

With winter on its way, now is the time to find a seminar on that QuickBooks or computer subject that you've been meaning to bone up on, on that tropical island where your wife has been bugging you to take her, and on that luxury cruise liner that'll take you there in style.  If arranged correctly, you'll reap a much needed tax write off, too.  ¡Buen viaje!

 
This article is provided for informational purposes and is not intended to be construed as legal, accounting, or other professional advice.  For further information, please consult appropriate professional advice from your attorney and certified public accountant. 

Have a tax or an accounting question?  Please feel free to submit it to William Brighenti, Certified Public Accountant, Hartford CPA Accountants.  For information and assistance on any tax and accounting issue, please visit our website:  Accountants CPA Hartford.


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.  The above tax advice was written to support the promotion or marketing of the accounting practice of the publisher and any transaction described herein.  The taxpayer recipients of this offering memorandum should seek tax advice based on their particular circumstances from an independent tax advisor .

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