Entertainment expense on a cruise ship

[BulldogTom]

TP has a construction business. Wants to take one of his best customers on a cruise to show appreciation for all the work he gets from him.  10 days Miami to LA via the Panama Canal.  Can he deduct as entertainment expense subject to the 50% reduction rules?

 

I know that conventions and seminars on cruise ships have limits, as well as purely transportation trips limited to 2X the daily federal per diem.

 

Something keeps telling me there is a restriction on this that I am missing.

 

Any help appreciated.

 

Tom

Newark, CA

[DANRVAN]

At a glance, I can see several issues here. How much time was devoted to business?  How many family members were present?  Reasonable and ordinary expense?  Sounds like a vacation to me. I see now is asking in advance, that is good.

[Jack from Ohio]

That large an expense for ONE client?  Probably would not stand up at audit.

[Elrod]

Tom,

 

From Pub. 463

 

To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that:

• The main purpose of the combined business and entertainment was the active conduct of business,

• You did engage in business with the person during the entertainment period, and

• You had more than a general expectation of getting income or some other specific business benefit at some future time.

 

Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter.

You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. It is not necessary to devote more time to business than to entertainment. However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test.

 

See below link.

 

http://www.irs.gov/publications/p463/ch02.html#en_US_2013_publink100033852

Edited January 19, 2015 by Elrod

[BulldogTom]

Thanks.  I just sent him an article on the definition of business entertainment and all the substantiation that he would need and he decided it would not be a business trip.

 

Tom

Newark, CA

[Richcpaman]

Tom:

 

Look up tax court cases.  The attorneys in New York that had tickets to the Yankees.  The IRS audited and threw out $80k in T&E Expenses for 4-6 people attending the games, meals, hotels, limos and other travel and incidentals.

 

The IRS lost in tax court.

 

Can not remember the cite.  It was in the last three years. 

 

If your clients do it right, and follow the rules, they can win.

 

Rich

[kcjenkins]

But is it really worth the cost and the stress and the time?  Even if they did win in Tax Court, it takes years and legal expense.  Better ways to show a client 'appreciation' that don't generate an automatic audit, IMHO. 

[Richcpaman]

KC,

 

It isn't about Tax Court and getting there, because few, if any of us, will ever get there.  We do not work for the IRS, we work for our clients.  The case I cited above?  The IRS asserted that the T&E was "excessive" and the Tax Court disagreed, finding nothing in the law that states the just because the amount of a particular T&E activity is high it is excessive.  The taxpayers paid alot to entertain, because they earned a lot from the clients.  Just like the OP in this case.  He wants to pay for the T&E of a client that has brought him lots of business.  The de-minimus rules exist, and if you go past that, its a documentation issue, and once you have that covered, then you are in compliance.

 

Rich

[BulldogTom]

Rich,

 

I appreciate what you are saying, and the only reason I posted this is because I thought there was a chance, knowing the TP as well as I do.  The real challenge is finding a business discussion that will happen on the cruise.  Like I told the TP, if they brought a couple of contracts and negotiated them while on the cruise, if they did something substantial that could be considered a business purpose, then we could follow the documentation rules and try to beat an audit.

 

So I printed out an article that told him exactly what he would need to document and his response was "I would spend the whole 10 days writing everything down."  This TP is "documentation challenged" to the max.   Decided he would just pay for it and call it a vacation.   The client he is taking has done a significant amount of work with the TP business over the years, and as often happens, they became close friends and they vacation together occasionally.

 

It is too much for him to risk an audit.

 

Again, I appreciate what you are saying, and I take your advice seriously.

 

Thanks

 

Tom

Newark, CA

[DANRVAN]

I believe there is a big difference between a 10 day busniess appreciation cruise with an established client/friend and the case referred. (Out of curiosity, I did a quick search and came up empty.)

 

Entertainment deductions for attending sporting events are not uncommon and often allowed. There is a special rule for Sky Boxes to keep the expense to a "reasonable amount."

 

The case mentioned might have involved high dollar lawyers with high dollar clients where the expense was pocket change to them.

 

In the case of Miller, 1998, which disallowed a "business cruise", the court questioned "whether the income that could be generated by a particular trip would be in excess of the expenses".

 

While court cases are good for educating clients, they are usually not the law. In regards to favorable court cases you have to think not only about facts and circumstances but also as to whether it has or might be appealed. For unfavorable cases watch for the words accuracy related penalty.
 

Edited January 21, 2015 by DANRVAN

[Max W]

There is a limit of $2,000 per year for cost of conventions, seminars, and meetings directly related to your business and only if the cruise ship is a vessel registered in the U.S. and all of its ports of call are within the U.S. and its territories.  

This is ruled out on two counts-1. cruise ship registry - There’s only one big sea cruise ship registered in USA – ms Pride of America, and the sole reason for that is she sails in Hawaii exclusively, the whole year round.

 

2. The planned cruise will certainly have ports of call outside the USA. 

[ILLMAS]

Maybe your tax client has a broad definition of what travel and entertainment is?