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Jun 27 '22 June 29, 2022

A “working condition fringe benefit” is tax-free to your employees and deductible by your company. To qualify for this tax-favored treatment, however, the expense must be “ordinary and reasonable” under the circumstances. In addition, if the benefit involves recreation, amusement or entertainment, the expense

Taking a Business Cruise?

Here is what the IRS says about the deductibility of cruise ship business travel.

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.
1.   The convention, seminar, or meeting is directly related to your trade or business.
2.   The cruise ship is 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 attach to your return a written statement signed by you that includes information about:
a.   The total days of the trip (not including the days of transportation to and from the cruise ship port),
b.   The number of hours each day that you devoted to scheduled business activities, and
c.   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:
a.   A schedule of the business activities of each day of the meeting, and
b.   The number of hours you attended the scheduled business activities.

Source: IRS Publication 463

must be directly related to — or associated with – your business.

The IRS frequently questions corporate entertainment deductions but as one case illustrates, taxpayers taking significant write-offs can prevail.

Facts of the case: For 40 years, Townsend Industries conducted an annual two-day sales meeting at its headquarters. Following the meeting, the Iowa printing press manufacturer sponsored a fishing trip for all of its staff members at a resort lodge in Canada. Generally, about half of the employees attend. The activities at the lodge included fishing and golfing in groups. By mixing up workers from different departments in this relaxed environment, Townsend stimulated business discussions.

The IRS challenged the company’s deductions and claimed the benefits to the employees represented taxable wages. In other words, a portion of these wages should have been withheld for income tax, Social Security and Medicare taxes.

After a series of twists and turns, the case wound up before the Eighth Circuit Court, which ruled that the cost did qualify as a working condition fringe benefit

Here are the reasons cited by the court:

The employees viewed the excursions as a regular part of their business routine. “Although the trips were voluntary,” the court noted, “nearly all of the Townsend employees who testified felt an obligation to attend and some felt that it was part of their job.”

The outings were limited to employees only. No spouses or children were allowed. This was additional evidence that the trips were not “some sort of paid vacation,” the court stated.

Specific business activities were included as part of the trips. The court noted that employees and salespeople were exposed to Townsend products, a new product was initiated and subsequently introduced, and current business practices were discussed at length. (Townsend Industries Inc., CA-8, No. 02-3756 9/15/03)

Caveat

This decision should not be viewed as carte blanche to sponsor tax-advantaged recreational-type activities for employees. In fact, the court insisted the ruling does not mean that “in all cases in which a corporation sponsors hunting, fishing, or other trips to ‘luxury’ vacation spots, the sponsoring corporation can avoid including the per-employee cost of the trip in its employees’ wages merely by presenting testimony relating to business allegedly conducted during the sojourn.”

It’s recommended that you adopt a formal agenda for business discussions and record any significant developments or resolutions. Consult with your tax adviser for more information.