Mark Pestronk is a Washington-based lawyer
specializing in travel law.
Q:I have been trying to sell my corporate client on the idea of offering a free cruise to its most
valuable salespeople. However, the cor-
poration’s in-house travel manager has
repeatedly shot down the idea, saying that
the trips would not be a tax-deductible
business expense if they are on a foreign-
flagged cruise ship. I have read that when
it comes to corporate incentives, it doesn’t
matter which ship, cruise or destinations
are involved — they are all tax-deduct-
ible. Who is right?
A:You are. Although there are many tax laws and regulations that strictly limit or outlaw deductions
of cruise expenses by passengers, those
laws do not apply to pure incentive travel.
The corporation can pay for any cruise
anywhere on any ship, and deduct it all, if
the trip is a reward for performance.
The same rule applies to cruises for customers or independent contractors of corporations. The corporation may reward them
with a cruise and deduct the entire cost.
Of course, like all tax laws, there are
complications. In order to be deductible to
the corporation, the gift must not be “lav-
ish or extravagant.” Amusingly, the IRS de-
fines the term by stating what it is not:
Therefore, since the IRS has said that
expenses for “deluxe resorts” are not lavish
or extravagant, and since cruises compete
with resorts for incentive clients, it seems
to follow that deluxe cruises are not in that
The flipside of tax deductibility is that
part if not all of the fair market value of the
cruise is generally considered income to the
recipient, which means that he or she must
pay income tax on at least part of that fair
market value. To avoid a major tax burden,
the corporation can include a cash allowance approximately equal to the taxes that
would be owed in an average tax bracket,
although that allowance itself would be
What probably confused the corporate
travel manager was another set of tax rules:
However, there are limits to the deduction: The most you can deduct is twice the
highest federal per diem for domestic cities; as of September 2014, that per diem is
$374, so the most your can deduct is $748
Even here, there are exceptions to the
exceptions, so consult a knowledgeable
CPA or tax lawyer if you have further
To submit a question for Legal Briefs,
email Mark Pestronk at mark@pestronk
Client can deduct incentive cruise if not ‘lavish or extravagant’
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However, the fair
market value of
the cruise is con-
sidered income to