Tax-Deductible Cruise Ship Travel to Mexico

Question

My wife and I operate our business as an S corporation. We are thinking of having our stockholders’ meeting in Mexico and taking a cruise ship to and from the meeting destination. Will this trip be deductible?

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Answer

Yes, but only after we make a couple of changes and add some clarity to this trip.

First, we want to change the reason for your trip from “stockholders’ meeting” to “directors’ and officers’ meeting.”

As a stockholder, you are an investor, and since investment seminars and meetings are not deductible, you do not want to travel to a stockholders’ meeting.

Instead, you are going to have a directors’ and officers’ planning meeting. Directors govern the corporation, and officers manage the corporation. Since you and your wife are both directors and officers, this planning meeting is a strong start to your deductible trip.

But it could be better.

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Education Is Perfect

As an aside, here’s something to think about: a business reason that we have long liked for a trip to Mexico is to attend an educational program that improves or maintains the skills you need in your business.

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North American Area: A Special Area for Tax-Deductible Travel

Because Mexico is in the tax law–defined North American area, the law says that you need no stronger business reason to deduct your trip to Mexico than you need to deduct a trip to Chicago, Illinois, or Scottsdale, Arizona.

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Ordinary and Necessary

Your trip to Mexico must meet the ordinary and necessary standard.

Qualified education is ordinary and necessary.

For your directors’ and officers’ meeting, which will address management and planning, your ordinary and necessary business reason could be as simple as needing to leave town so that the ordinary daily claims on your time do not interfere with your planning. The court accepted this “get away from the daily stuff” rationale as an ordinary and necessary business reason in the Heineman case.

In this case, the court allowed Mr. Heineman, the chief executive officer of a Chicago corporation, to deduct a $250,000 office that he constructed at his family’s summer home in Wisconsin for his one-month-a-year business planning session away from the Chicago office.

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Get Off the Boat

The next thing you must do is to get off the boat for the meeting. If you have the meeting on the cruise ship, you will lose the cost of the cruise as a deduction. Thus, you want the meeting to take place on land, and the ship to be the mode of transportation to and/or from the meeting (you can use an airplane for one leg of the trip or for the entire trip).

For the on-land meeting, look for an office building or hotel that rents offices or boardrooms by the day.

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Travel Rules to Consider

Less-than-one-week rule. If your trip is outside the 50 states but inside the North American area, and if the trip is for seven or fewer days (excluding the day of departure), then the law allows you to deduct the entire cost of travel to and from this business destination. Mexico fits this location rule.

Cruise ship transportation. The law authorizes any type of transportation to and from your travel destination, so long as it is not lavish or extravagant. The cruise ship cost is not a lavish or extravagant expense, as the law precludes this possibility by placing luxury water limits on this type of travel.

The daily luxury water limit is twice the highest federal per diem rate allowable at the time of your travel.

Example. Say you are going to travel by cruise ship during September 2022. The $433 maximum federal per diem rate for September 2022 comes from Nantucket, Massachusetts. Your daily luxury-water limit is $866 (2 x $433).

Thus, for you and your wife, two business travelers, your daily limit is $1,732. On a six-night cruise, that’s a cruiseship cost ceiling of $10,392. If you spend $12,000, your deduction is limited to $10,392. If you spend $8,000, you deduct $8,000.

In addition, you can deduct the cost of the meeting room, your airfare to and from the port of departure, and other expenses of this trip.

(And as we mentioned, you can take a one-way cruise to the meeting and fly back.)

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