If you want to attend a convention, seminar, or similar meeting onboard a cruise ship and deduct all your costs on your Coeur d’Alene business, you face some very special rules. But it can be done.
When you know the tax code rules, you will find an enlightened workaround that removes almost all the hassle and gives you what you want.
The IRS considers all ships that sail cruise ships.
In 1982, your lawmakers were attempting to give the U.S. cruise ship industry a leg up by outlawing all cruise ship conventions, seminars, and similar meetings other than those
- that take place on a vessel registered in the United States, and
- for which all ports of call of such vessel are located in the United States or in possessions of the United States.
The 1982 law remains on the books. Lawmakers have not updated the limits for inflation. Here’s the cruise ship convention tax code rule as it existed in 1982 and as it exists today:
With respect to cruises beginning in any calendar year, not more than $2,000 of the expenses attributable to an individual attending one or more meetings may be taken into account under Section 162 . . .”
Had the $2,000 been indexed for inflation, the 2019 amount would be a reasonable $5,431, and that would likely encourage more 2019 U.S. cruise ship convention-type travel.
The $2,000 is pretty skimpy (perhaps ridiculous) when you consider that the expenses include
- the cost of air or other travel to get to and from the cruise ship port;
- the cost of the cruise; and
- the cost of the convention, seminar, or similar meeting.
Bigger, Better Deductions with Less Hassle
This is a way you can avoid the $2,000 limit, take the cruise you want, and likely deduct all your costs under your Coeur d’Alene business. And this does not have to involve a U.S. ship. Any ship from any country works.
Here’s the strategy. You take the cruise ship to a convention, seminar, or meeting that’s held
- on land, say at a hotel, and
- in the tax-law-defined North American area.
When you meet the two easy requirements above, you deduct (a) the full cost of getting to and from the location; (b) the full cost of the convention, seminar, or similar meeting; and (c) likely the full cost of the cruise if your onboard ship expenses are less than the current daily luxury water limits.
By using the 2019 luxury water limits, if your average daily cost of the cruise is $692 or less, you can use this strategy to deduct all cruise ship costs to travel to and from the seminar.
Here’s a true story from the IRS.
To put the story in context, I am putting you in the driver’s seat.
You Buy a Vehicle
You buy a new vehicle from your local dealership with zero percent financing. You complete all the paperwork, including the purchase order and vehicle registration, and leave the dealership owning the vehicle.
The next day, the dealership calls you and says there’s been a mistake: you are not eligible for zero percent financing. To correct the mistake, the dealership asks you to return and sign a new contract with an interest rate.
Recognizing a good deal when you see one, you refuse.
Dealer Gone Mad
Your refusal makes the dealership mad; in retaliation, the dealership voids your vehicle registration. You complain to the Department of Motor Vehicles, which
- reinstates your vehicle registration and
- sends a written warning to the dealer.
Dealer Madder Now
Still upset and looking for a means to do damage to you, the dealer sends you a Form 1099-INT showing $2,997.60 of interest income, the amount of interest you saved on this transaction.
You are not happy about the 1099, so you write to the IRS and ask whether the dealership has a legal right to send you a 1099 for the interest you saved.
Here’s what the IRS says: the 1099 is bogus.
In its letter, the IRS states that you do not pay interest to the dealer when you have a zero-interest contract; therefore, it is impossible for you to have cancellation of indebtedness income due to interest that you do not owe. The dealership forgave nothing, because you have a valid contract for zero interest.
Tax Law Damages
Even better, in the next paragraph, the IRS informs you that under Section 7434, you may bring a civil action against this dealer for willfully filing a false information return. If you win this case, the dealer will be liable for damages to you equal to the greater of
- $5,000, or
- actual damages, court costs, and reasonable attorneys’ fees.
If You Win, Tell the IRS
The IRS then tells you that if you bring this action for the false 1099, you should send the IRS a copy of the complaint when you file your claim with the court.
Zero Interest Rule
In the tax law, there is no such thing as zero interest. When an installment contract calls for less than the minimum interest, both the buyer and the seller must impute interest. The imputation is done individually, and no 1099s are involved.
Now, here’s a nice break. If this is a Coeur d’Alene business vehicle for you, you
- pay zero interest under the contract, but
- deduct interest on your tax return using the imputed interest rates.
Here’s another piece of news that will put a smile on your face.
The dealer also has to impute interest. For the dealer, this means reducing the sale price and recognizing imputed interest over the life of your installment payments. The dealer does this for both financial reporting and tax purposes. Thus, from a financial standpoint, the dealer
- is out $2,997.60 of interest income that you will never pay,
- must reduce current-year profits by the imputed interest amount, and
- must recognize imputed interest income as you make payments.
You could say you really stuck it to this dealer. And you are not finished, assuming that you pursue the bogus 1099 penalties.
You have to love the fact that if someone is making trouble for you by giving you a fraudulent 1099, you have tax code remedies.
And when you consider everything, you can likely make far more trouble for the culprit than you suffer.
If you own a condominium, cottage, cabin, lake or beach home, ski lodge, or similar property in the Coeur d’Alene area that you rent for an “average” rental period of seven days or less for the year, you have a property with unique tax attributes.
Seven days example. Say you have a beach home and you rent it 15 times during the year, for a total of 85 days. Your average rental is 5.7 days. That’s an average of seven days or less for the year.
The right type of Coeur d’Alene beach home or vacation cottage can produce great tax results when the average rental period is seven days or less.
But it’s tricky because when the average rental period is seven days or less, the property is not a rental property as defined by the tax code. Instead, the property is
- a commercial hotel type property that you report on Schedule C of your tax return if you provide services in connection with the rentals, or
- a weird in-limbo property that you report on Schedule E when you don’t provide services.
If the property shows a loss, you can deduct that loss on either Schedule C or Schedule E if you can prove that you materially participate. With the seven-days-or-less-average rental, you likely have only two ways to materially participate:
- The combined participation by you and your spouse constitutes substantially all the participation in the seven-days-or-less-average rental activity when you consider all the individuals who participated (including contractors).
- The combined hours of participation by you and your spouse in the seven-days-or-less-average rental activity are (a) more than 100 hours and (b) more hours than the participation of any other individual.
Example. Your seven-days-or-less beach rental produces a $20,000 tax loss for the year. On this rental, you spend 65 hours during the year. No other person works on the rental. You materially participate in this rental, and the $20,000 is deductible—period (regardless of its location on Schedule C or E).
Coeur d’Alene Rental Profits
If you have a profit on the rental, you likely have a Section 199A deduction when you report the rental on Schedule C as a business. Although not deemed a business by Schedule E reporting, the Schedule E rental could rise to the level of a business as defined for the Section 199A deduction.
If you have one of these seven-days-or-less-average Coeur d’Alene rental properties and would like to discuss it, please don’t hesitate to call us at (208) 415-1850