How many of y’all have been to see the famous swimming pigs of Big Major Cay in the Bahamas’ Exuma chain?
It’s close to the top of Jennifer’s desperate-to-visit list.
Since we love selling relaxing getaways to Sandals resorts, a trip of our own to nearby Sandals Emerald Bay might be a good way to combine a little work with a trip on the desperate-to-visit list.
This is the sort of trip that nearly every travel pro takes and one that I like to call the self-funded FAM trip.
Your might wonder:
Is a self-funded FAM tax deductible for a travel business owner?
Let’s run through the answer, and discuss some of the finer points of tax deductions for travel agents (you really do have to incorporate a few swimming pigs to make a discussion of tax deductions more tolerable).
We’ll use our self-funded FAM to Sandals Emerald Bay with an excursion to Big Major Cay as an example.
We’ll plan this trip for late summer, let’s say the second week of September.
The total all-inclusive cost will be $5,000 with one $300 excursion off the resort to Big Major Cay.
Total cost $5,300.
Is this cost a tax deductible business expense?
Let’s explore the answer.
The IRS does allow you to deduct certain business expenses.
What is a business expense?
There are a number of ways we can define a business expense, but since we’re talking taxes, we’re going to stick with what the IRS has to say.
The IRS publishes a ton of information every year. They give them all publications numbers. They have one called Publication 535 Business Expenses. They generally publish it annually, and it’s a great place to start in understanding business expenses and tax deductions.
We’ll call it Pub 535.
Pub 535 defines business expenses as those costs incurred in the line of business that are both “ordinary and necessary.”
It goes on to say:
“An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
The IRS uses a few benchmarks that we can compare our Emerald Bay trip to:
- Ordinary and necessary
- Common and accepted
- Helpful and appropriate
Let’s compare to the benchmarks:
Is our trip ordinary and necessary?
Yes, travel is a ordinary expense within the travel business and nearly every reasonable travel business owner would likely consider travel to a destination you sell or are exploring as a possible client option, as a necessary part of the business.
Is our trip common and accepted in the travel biz?
That’s an easy one: yes!
Travel to destinations that your business commonly sends people to is an extremely common and accepted expense in the travel business.
Is our trip helpful and appropriate?
Why? There’s nothing like visiting a place to get to know it well enough to sell it effectively. And any reasonable travel business owner would likely agree.
Is our trip an indispensable expense?
I think we would be hard pressed to call it indispensable, but according to Pub 535, “An expense does not have to be indispensable to be considered necessary.” So, we’re ok on that one.
While there seems to be a bit of redundancy in the IRS’ benchmarks, our self-funded FAM would appear to satisfy each one.
Let’s pull out another quote from Pub 535:
“Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. In some cases you may not be allowed to deduct the expense at all. Therefore, it is important to distinguish usual business expenses from expenses that include the following: The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses.”
According to the IRS, there are certain expenses that we might not be able to deduct immediately and there are certain expenses that we might not be able to deduct at all.
- Cost of good sold
- Capital expenses
- Personal expenses
Both cost of goods sold and capital expenses are deep subjects for we accountants, and we’ll save those for a future post, let’s concentrate here on personal expenses.
Here’s another quote from Pub 535:
“Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.”
Here’s where I like to think on things just a little harder before taking any tax deductions.
If we’re all honest across the travel industry, we’ll acknowledge that while much of our travel is exclusively business-related some does have a personal aspect.
It’s really pretty easy to distinguish.
Take Sandals for instance. Sandals hosts some pretty well known FAM trips that are essentially marathons where agents visit half a dozen resorts over the span of a few days. There’s a cost involved for agents, and I believe any reasonable person – hopefully including a reasonable IRS agent/auditor – would conclude such a trip was totally business.
Our self-funded FAM to Sandals Emerald Bay might be in a different category.
Here’s how we make the split.
In this example it’s our first visit to Emerald Bay, and we do frequently sell Sandals.
The trip definitely has a strong business aspect to it. But, we want to see those swimming pigs, and that second week of September that we chose as a time to travel is actually our wedding anniversary, so let’s say the cost of the Big Major Cay excursion was all personal and the rest of the trip was 75% business 25% personal.
How did we arrive at those percentages?
For this example, I’m basing those percentages on past experience with such trips. We spend about 75% of our time taking notes and photos of the locations and making sure we see every bit of what’s available. We spend about 25% of the time relaxing and engaged in purely personal pursuits. I document what we’ve done and have it as backup just in case the IRS has a question.
Just to review,
We’ve determined that our trip to Sandals Emerald Bay is a partial business expense with 75% of the total trip, less the excursion to Big Major Cay, being exclusively business.
What amount of the trip can we deduct?
Now, it gets a little more complicated and I’ll deal with that in my next post on tax deductions, so stay tuned.
Before I end though, a little disclaimer:
You’ve probably noticed that I’m not being definitive with many of my statements.
I’m saying things like “may” and “might.” That’s because – especially where taxes are concerned – every situation is different and I don’t want to tell you something that might not be precisely correct in your situation. If you have a question about a specific situation don’t hesitate to reach out to me directly, or bounce the question off another CPA or tax advisor.