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Hey there, fellow real estate investors, FIRE enthusiasts, and tax aficionados! Welcome to "Real Estate is Taxing" – your go-to weekly podcast for all things real estate taxes, hosted by Natalie Kolodij, EA- Real Estate Tax Strategist and dry humor extraordinaire.
Each week, we're breaking down complex tax topics into bite-sized, understandable explanations, with no regard for how many obscure references it takes to get there.
Speaker: 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 Kalady, I'm
your host, and I am so excited
that you've decided to join me.
Microphone (Shure MV7)-1: 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.
There's a lot of blogs and articles out
there, but they're all fairly vague or
they give very 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.
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.
Microphone (Shure MV7)-3: 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 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.
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.
They're renting out
general speaking areas.
And attendees pay for the room.
And the cruise fare, it's all
typically rolled 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.
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 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.
Microphone (Shure MV7)-4: 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.
Microphone (Shure MV7)-5: So when
we just start off with looking at
these two initial requirements, I
will 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 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.
Microphone (Shure MV7)-6: 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 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.
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.
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 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.
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.
Microphone (Shure MV7)-5: 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 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.
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.
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 be double that.
Which would be $1,128.
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 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 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.
Microphone (Shure MV7)-7:
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.
Those are two different
things you pay for separately.
The education might still be
deductible as a standalone item.
So there might be 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.
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 other
And potentially have that be a
deductible expense to your business.
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.
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.
One of the two experts was
unable to attend 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.
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.
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.
Microphone (Shure MV7)-8: 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 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 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.
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.
So just a little side note 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.
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.
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 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.
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.
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.
And as always, I will talk
to you guys next week.
Mhm.