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Laws
and Taxes Involving the Incentive Business |
| Here's
an overview of the critical issues involving laws and taxes affecting
the incentive and motivational meetings business. Please note that these guidelines do not take the place of getting appropriate legal or tax advice. |
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| Incentive
Travel and Meetings Navigating the mass of U.S. tax laws can be daunting for even the most experienced incentive travel professional. The following checklist is designed to guide you through the maze of regulations. |
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| How
is incentive travel different from meetings? What are guidelines for "pure" incentive travel? When is an award too lavish? What records need to be kept? What needs to be filed? What if business and pleasure are mixed? What if employees are reimbursed? Are there restrictions on per diems and mileage? What about company personnel required on the trip? What about when spouses share in the award? Are there special restrictions for foreign travel? What about cruises? |
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| How
is incentive travel different from meetings? "Pure" incentive travel awards are given as a prize for reaching set goals. Recipients are typically customers, employees, independent contractors, or service providers who have met sales or purchase quotas or performance goals. For tax purposes, pure incentive travel is "pleasure travel awarded for a business purpose." That means the sponsoring company can deduct the cost of the award (what the business actually paid, regardless of fair market value), and the recipient must report the fair market value of the award as income. A meeting is defined as an event that takes place primarily for the purposes of educating, motivating, and communicating, without any need for recipients to perform. Meeting planners should make sure they have documentation to prove that an event was indeed a meeting, such as agendas, programs, and premeeting materials. |
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What are the guidelines for "pure" incentive travel? The crucial phrase in determining deductibility of your incentive award is whether the program was "ordinary and necessary." However, there is no clear standard of "ordinary and necessary." If the award program benefits the sponsoring company (by encouraging high performance), and the awards are not too lavish, the program usually will be deemed an "ordinary and necessary" business expense. |
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When is an award too lavish? In addition to the need for a profitable business relationship between sponsor and recipient, the value of the award must be in line with the value of the business benefit provided by the customer, employee, or supplier. The award of a $5,000 cruise for a customer's purchase of $200 worth of equipment, for example, would probably be seen as "lavish and extravagant." A red flag might go up at the Internal Revenue Service (IRS), which would most likely disallow the deduction. If the IRS perceives the award as other than furthering that business's interests, it will treat the award as a gift. The giver is limited to a deduction of $75 per recipient per year, but the recipient does not have to report the award as income. |
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What records need to be kept? The Treasury Department has clear "substantiation and documentation" guidelines that should be followed, particularly when the recipient is an employee. Awarding companies should protect their deductions by maintaining an account book, a diary, or a statement of expense. They should also retain canceled checks, credit card slips, and hotel receipts. Records should reflect the amount of each expenditure, times and places of travel, the business purpose of each expenditure, and the recipient's business relationship to the awarding company. |
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What needs to be filed? Awarding companies can protect their deductions by filing the correct paperwork on recipients. For customers and contractors/suppliers, that means reporting any award that exceeds $600 in value, provided the recipient is not a corporation. File form 1099 MISC, along with Form 1096, by February 28 of the calendar year following the year in which the award was made. If the recipient is an employee, the employer must declare the value of the award as compensation to the employee and as wages for the purpose of withholding, using a W2 form. Recipients should know that the full cash value of the award (including reimbursed expenses) will be counted as gross income and should be entered on their 1040s. |
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What if business and pleasure are mixed? "When a trip is taken for the purpose of business as opposed to pleasure, it is not a 'pure' incentive travel situation," explains Jim Gossett, attorney for the Society of Incentive Travel Executives (SITE). When a trip is made for both reasons, then it is a matter of determining which purpose is dominant. When it's a business trip, expenses to and from the destination might not be counted as income to the traveler, and may be deductible under certain conditions. When it's pleasure, those expenses would be counted as income. Other expenses can be divided into "primarily business" or "primarily pleasure" categories and treated accordingly. When expenses are deemed necessary to business and are not reimbursed by the employer, the IRS throws in a caveat: An employee may deduct only the amount of total annual business expenses that exceed 2% of his or her adjusted gross income. The amount of expenses below that limit in not deductible. |
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What if employees are reimbursed? The 2 percent rule makes it important for employees to seek reimbursement using a plan that conforms to IRS guidelines. If the employer uses an "accountable reimbursement plan" (employees must substantiate, according to IRS Code 274, each expense being reimbursed), then reimbursed expenses are not counted as income, are not reported as wages, and are not taxed. When an employee does not substantiate his or her expenses, reimbursed expenses are treated as income, must be reported on the employee's W-2 form, and are subject to income taxes. The employee can deduct these expenses as itemized miscellaneous deductions subject to the 2% rule. |
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Are there restrictions on per diems and mileage? The Commissioner of the IRS has the authority to establish standard mileage rates and per diem rates for business travel. If you elect not to follow the guidelines, you are still allowed to deduct your actual expenses, but you must substantiate each item. For more information on per diems, call 800-829-1040 and ask for updates in Code Section 274 of IRS Publication 463. |
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What about company personnel required on the trip? When company personnel are required to accompany recipients on a trip, their involvement is treated as a business expense. However, the IRS loves to challenge these deductions. |
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What about when spouses share in the award? If the spouse of a recipient is included in a "pure" incentive travel award, the value of the award becomes part of the couple's income and can be fully deducted by the awarding company. If the trip is for business, the cost may be nontaxable (as income) for the recipient, but the spouse's expenses become nondeductible by the recipient unless he or she can prove that the spouse's participation served a "bona fide business purpose." The IRS recently changed the rules to require that the spouse be an employee of the primary business traveler to claim deductions. |
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Are there special restrictions for foreign travel? When a trip meets the requirements for "pure" incentive travel, treat foreign travel as you would any other incentive travel award. Problems arise when the trip is characterized as a meeting. The IRS does not allow business deductions for travel to conventions/seminars/meetings outside the "North American area," unless it's proven that the meeting was directly related to the conduct of his or her business. |
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