Travel agents often tout cruise ships as ideal settings for conducting business because they can be written off as a business expense. Cruises also get pushed as the preferred mode of transportation to get to a destination over flying, because of this benefit. But like all things involving the IRS, there are rules that have to be followed in order for the deduction to be valid. After all, if you are having a good time, the IRS wants to limit or disallow the deductibility of the expense incurred.
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If you take your family along, you cannot deduct their expenses. And if you are attending a seminar or convention, you must prove that the subject matter benefits your trade or business. Keep flyers describing the content of the events and proof the dates align with your cruise travel receipts in the event of an audit. It also helps to write up a summary of the event to ensure its deductibility. If the event centers on investments, political issues or social networking, you do not have a valid deduction.
The IRS limits the deductibility of cruise ship travel to double the highest federal per diem rate, which is what the feds pay their employees when they must travel on business within the country. For 2010, the cruise per diem rates varied from $680-$822 depending upon the season. See Publication 463 for a complete breakdown.
The math gets a bit tricky when applying the rates if meals and entertainment are separately stated on your bill. If that is the case, you must first apply the 50% limit on meals and entertainment to determine the allowable amount. Then add it to your other travel expenses and compare the total to the allowable per diem rate and use the smaller of the two as your deduction.
For example: your meals and entertainment bills total $2,000 while your other travel expenses come to $3,000. Applying the 50% rule, your grand total is $4,000. Let’s say you traveled in October 2010 for five days. The per diem rate is $680 per day for a total of $3,400; your deduction is limited to $3,400. If your meals and entertainment are not separately stated and you still paid a grand total of $4,000, the deduction would still be limited to $3,400. You are not required to allocate meals and entertainment if they are not itemized on the bill.
The cost of the convention, seminar or business meeting can be deducted separately from the travel. Using the above example, if you paid $500 for the conference, your total deduction would be $3,900.
You are limited to $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.
The cost of international travel via cruise ship can be deductible, but only if there is a good reason to hold a business convention outside the North American area. The North American area includes Mexico, Puerto Rico, Canada and almost all of the Caribbean Islands as well as any islands, cays, and reefs that are possessions of the United States.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know,” available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.