Deduction Expenses for Offshore Seminars and Conferences
 
by Vernon K. Jacobs, CPA


Under limited circumstances, some U.S. taxpayers may be able to claim a business expense deduction for the cost of attending an educational seminar or conference at a location outside of the U.S. and its territories. The following comments are an attempt to provide a relatively non-technical (plain English) explanation of the applicable tax rules.

Over the years, the tax laws have been modified to prohibit what the Congress (perhaps prompted by the IRS) regards as an abuse of certain beneficial provisions of the tax law. One of these provisions was the deduction that was permitted for educational expenses, including the cost of attending a seminar or convention and the related travel costs. Numerous restrictions have been imposed to the point where being able to get a deduction for some or all of the costs of attending a seminar or convention outside the USA is like trying to work through a maze.

In order to better understand the type of educational programs that are still deductible, it will help to briefly review some of the education/seminar expenses that are no longer deductible. Discussing these exceptions first also reduces the need to introduce a confusing list of exceptions later in this discussion.

No Investment Expense Seminar Deductions After 1986

Prior to the Tax Reform Act of 1986 (86 TRA), a lot of investors enjoyed tax deductible vacations to popular resorts both in the U.S. and outside the U.S. They would deduct the cost of attending the seminar, plus the travel, lodging and most of their meal expenses [1].  The Congress felt the deduction for educational expenses was being abused so they passed a new section of the tax code [2] that explicitly prohibits investors from deducting seminar (aka education) expenses and related travel costs.  More precisely, the change applied to all taxpayers other than those who incurred such expenses in their trade or business. [3]

Itemized Deductions Must Exceed 2 Percent of Adjusted Gross Income

Another change introduced by the 86 TRA was the elimination of miscellaneous itemized deductions to the extent of 2% of adjusted gross income [4]. Deductions for investors and employees fall into this category. Deductions for the self employed are not treated as itemized deductions.

Employees sometimes incur expenses relating to their job. Some employers inform employees that their salary or commission includes compensation for such expenses. Expenses that are not reimbursed under what the IRS calls an “accountable plan" [5] can be deducted by the employee as a miscellaneous itemized deduction – subject to the limitations on such deductions.

However, if an employer reimburses the employee for the exact amount of expenses, the employee may exclude the reimbursement from income and is not subject to the restrictions for miscellaneous itemized deductions. An accountable plan is basically a plan whereby the employee accounts for all of the expenses and receives a reimbursement of those specific expenses. An “allowance” to be used for unspecified travel expenses is not an accountable plan for this purpose.

Limits on Deducting Meal and Entertainment Expenses

The 86 tax law also introduced a provision that limited business meal and entertainment deduction expenses to 80% of the amount spent after 1986. [6] This was reduced to 50% by the Omnibus Budget Reconciliation Act of 1993 for tax years after 1993. This rule applies to investors, employees, employers and the self employed. If an employee (or independent contractor) is reimbursed for meal expenses, the limitation applies to the employer.

Limits on Itemized Deductions by the Alternative Minimum Tax

Although introduced before 1986, the AMT is a system of computing the income tax without the benefit of many types of deductions – including miscellaneous itemized deductions of employees and investors. Thus, for higher income taxpayers[7]  employee expenses and investment expenses may be deductible for the regular tax but not for the AMT. 

Combining Business and Personal Travel

The general rule is that travel expenses incurred for business are deductible. [8] but personal travel costs are not. When a trip is taken for both business and personal purposes, the issue is whether the primary purpose of the trip was for business. Whether the primary purpose is business or personal depends on the facts and circumstances. However, in most cases, the number of days of business activity versus the number of days of personal activity can be used to make that distinction. And, for domestic travel, travel days and non-business days (weekends and holidays) are counted as business travel days.

Travel Expenses for a Spouse or Children

The travel costs of a spouse or child are not deductible. But if the travel is by car, then it costs the same for a family of four as for the taxpayer. And if the cost of lodging is the same for one person as for two or more, then the lodging cost is still deductible. But air fare for a spouse or children would not be deductible and the cost of an extra room for older children would not be deductible.

One of the more contentious issues involves the question of whether the travel expenses of a spouse can be deducted if the spouse is involved in some manner in the business activity. Generally, mere clerical or social activities by the spouse is not sufficient. The basic test is whether the travel by the spouse would be deductible without regard to the travel or business activity of the taxpayer [9]

Special Rules for Expenses of Investigating a Business Acquisition

The expenses incurred in doing due diligence relating to the acquisition of a new business are not deductible if the business is acquired. [10] Such costs must be capitalized and may be amortized over a period of 15 years. [11] However, if the business that is being evaluated is not acquired, the business can deduct the due diligence costs as a business loss. [12] This rule only applies to someone already engaged in a related trade or business. If a taxpayer is investigating a new kind of business, and then abandons that effort, the expenses are not deductible. [13]

Special Rules for Foreign Travel Expenses

For domestic travel, some travel and lodging costs may be deductible even if the primary purpose of the trip is personal. If the primary purpose of the trip is for business, it is not necessary to allocate the travel costs between personal and business. In addition, week ends, holidays and travel days are not counted as personal days.

With foreign trips, the rules are a lot more restrictive [14]. For travel outside the USA and its territories each day must be designated as either business or personal. Based on this rule, travel and lodging costs are only deductible to the extent of the portion of the trip spent on business travel. Weekends, holidays and travel days are included in the calculation.

But there are exceptions to this harsh rule. 

  • First, time for travel within the USA is not counted.
  • Second, a trip of a week or less is not considered to be foreign travel.
  • Third, if the trip is for more than a week but if less then 25% of the total time is for non-business activities, the foreign travel allocation rules do not apply. Thus, on a 12 day trip, if only 2 days (less than 25%) is not for business, then the foreign allocation is not required.
  • Fourth, in computing “more than a week”, the day of departure is not counted, but the day of return to the US is counted – but only if that computation results in less than seven days outside the US.
  • Fifth, if business activities can’t be pursued for reasons beyond the control of the taxpayer, those days will be counted as business days [15]. 
  • Sixth, if the taxpayer is not related to the employer who is paying for the trip, these rules do not apply.
  • Seventh, if the taxpayer had no substantial control over arranging the trip, the foreign travel rule does not apply.

Special Rules Apply to Foreign Convention Expenses

As mentioned earlier, the costs of attending seminars or conventions that are related to investment or other non-business purposes are not deductible. But expenses that are ordinary and necessary in the trade or business of a taxpayer are deductible as business expenses. For an unincorporated business, they would be deducted on Schedule C. Where the taxpayer does business through an entity such as partnership, taxable corporation or sub S corporation, the expenses are paid and deducted by the entity.

Deductions are not permitted for expenses incurred for a convention, seminar or similar meeting outside the North American area unless the purpose of the meeting is directly related to the conduct of a trade or business of the taxpayer. Furthermore, it must be as reasonable for the meeting to be outside the North American area as to be within it. [16]

Further Restrictions on Cruise Ship Conventions

A limited deduction of up to $2,000 per taxpayer is permitted for attending a seminar or convention on a U.S. flag ship if the taxpayer can show that the meeting is directly related to the trade or business of the taxpayer, and the taxpayer attaches a statement showing the number of days of the trip, a schedule of the program activities (presentations), and a statement that must be prepared and signed by an officer of the organization or group that sponsors the meeting.[17]

Who Can Deduct Seminar Expenses Outside the U.S.?

At this point a lot of readers might be wondering “what’s left?”

The answer depends partly on the nature of the program and the type of audience for whom it is intended. The program must have some direct bearing on the trade or business of the taxpayer who is paying for the expenses.

A conference on international money laundering might be targeted at lawyers, bankers, insurance executives, financial brokers, and anyone else who is in a business that must satisfy various know your customer rules. Because money laundering is an international problem, such a program could be directed at an international audience and could be held anywhere in the world. If the organizers and many of the speakers are not from the U.S., it seems reasonable that it would be held outside the U.S.

A conference on computer security technology developments would be likely to appeal to an international audience and would probably have an international mix of speakers. Anyone involved in a business that was affected by computer security issues could have a good reason to attend.

An investment conference on international investing might be deductible by trust officers, investment advisors or brokers, financial planners, lawyers who advise on such matters, tax accountants and others in businesses relating to the subject matter of the conference should be able to deduct their registration fees and travel costs.

There are some types of occupations where the subject matter of the conference does not have to be as closely related to their occupation. Examples include reporters, authors, editors and publishers. And those who manage, organize or sponsor such conferences have a clear business purpose to attend their own programs.

These examples are only intended to be illustrative of what the law appears to permit and are not based on any authoritative source such as the tax code or IRS regulations or rulings. Whether any particular person can deduct the costs of attending any particular seminar or convention outside the U.S. will depend on the specific facts and circumstances of that person and the specific purpose of the seminar or convention.

More Information About Deducting Seminar Expenses

The following are links to some articles on various web sites about deductions for attending seminars and conventions by other tax professionals.  These articles have not been evaluated as to their accuracy and are only listed as alternative sources of information. These links were valid on May 5, 2006 but may not be a later date.

Take a Working Vacation and a Deduction

Satisfying the IRS: Incentive Travel Tax Laws

Turning a Business Trip Into a Vacation

In the Tax Man's Shadow (1996)

Vernon Jacobs

CAUTION:  This article is not an authoritative source of information about the tax rules that apply to deducting the costs of attending and travel to a foreign seminar or conference. Only the Internal Revenue Code, applicable IRS Regulations and rulings, and applicable court decisions may be construed to be an authoritative source of tax law. Nor is this article intended to be construed as a “covered opinion” as that term is defined by IRS regulations in Circular 230.

This article does not attempt to provide a comprehensive review of all the potentially relevant tax code rules, regulations and court decisions that might apply to the subject. Taxpayers therefore may not rely on this information as a basis to avoid potential penalties for negligence or other issues that may be imposed by the IRS.

Taxpayers should not rely on this information without consultation with a tax professional that is familiar with the specific facts and circumstances of the taxpayer’s trade or business.

 About the Author:  Information about the author is available at www.vernonjacobs.com

 (c ) Copyright, 2006. Vernon K. Jacobs, All rights reserved.

Footnotes

[1] Expense deductions for investors are governed by IRC section 212

[2] TRA 86 Act section 142(c ); IRC Section 274(h)(7) modified IRC Section 212

[3] Deductions for trade or business expenses are governed by IRC section 162

[4] TRA 86 Act section 132(a) & (b); IRC sections 62 and 67

[5]  IRC 62(c ); See http://www.jkmcpa.com/AcctPlan.html

[6] TRA 86 Act section 142(b); IRC section 274(n)

[7] Reference to “higher income” taxpayers refers to the adjusted gross income of the taxpayer rather than to the taxable income under the regular tax computation. For the year of 2005, the AMT would not apply to a single taxpayer with an adjusted gross income of $40,250 or less or to a married couple filing jointly with an adjusted gross income of $58,000 or less.

[8] IRC section 162

[9] IRC section 274(m)(3)

[10] IRC section 195(a)

[11] IRC section 195. Note that this section permits a current deduction for start up costs that do not exceed $5,000

[12] Revenue Ruling 57-418 and 77-254

[13]  ibid

[14] IRS Regulation 1.274-4

[15] Revenue Ruling 63-144

[16] A list of countries in the North American area are included in Revenue Ruling 2003-109.

[17] IRC section 274(h)(2)



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