You get Morgan And Morgan way down there…
Just recieved this e-mail…Besides the education and kibbitzing there are tax advantages
1 of many
Tax tip: Combine Business with Pleasure
W. Murray Bradford, CPA firstname.lastname@example.org
5:22 PM (13 hours ago)
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Combining Business and Pleasure to Maximize Your Deductions
Read below about how a dental group combined fishing in Alaska with continuing education for a deductible business trip!
I am one of 18 dentists going on a fishing trip to Alaska with our dental study group. We will have continuing education (CE) programs with CE credits available on this trip. The CE courses will be taught by some of the dentists in this study group.
Although it seems like this would be tax deductible, the CE could be done anywhere, as the courses are just lectures given by some of the dentists. In other words, these courses could take place in our hometown or in Alaska. There are handouts, sign-in sheets, etc., but would this count?
One problem I can see is that we paid our deposit to the dental study group, but we pay the balance to the fishing charter company in Alaska. The fishing company provides the fishing and the lodging.
This is a three-day trip and I would assume about two hours of CE per day. Do you think this is going to fly as a tax deduction? (J.K., Tucson, AZ)
This trip needs some work to make it deductible. Here is one scenario that will pass muster.
Let’s start with a basic rule: when entertainment precedes or follows a directly related business discussion, the entertainment is deductible as associated entertainment.
Your dental study group is a formal organization established to assist members in both the clinical and business sides of dental practice. This study group is putting the Alaska meeting together for the primary purpose of educating its members, as is evident in the CE content of the programs you have planned.
Ideally, the cost of fishing would be separated from the cost of meetings, lodging, and airfare. The bundling of the fishing in your study group’s package makes it critical that you clearly establish your business purpose for this trip.
Establish Business Purpose
Step one in this process is to set forth that the fishing entertainment part of the meeting is designed simply to encourage more of the study group members to attend this CE program. The advantage of using the fishing is that it promotes business discussions outside of the formal meetings; for example, those additional business discussions that will occur on the boat and during cocktail hours, breakfasts, and dinners.
Thus, the combination of the CE meetings and recreational time is superior to one or two meetings in Tucson because the proximity of the group before and after the CE simply extends the value of the meetings and makes it more convenient and practical for each of the dentists to participate in the business discussions.
Having established the purpose, let’s get to the nuts and bolts of how you make the primary purpose of this trip business and how you make each day of the trip a business day.
We have specified the business CE sessions as the reason for the trip, and we are going to make the CE days count as business days. Thus, your business reason for the travel is to get to this educational activity, and once there, each day of the trip is going to be either a deductible travel day or a deductible business education day.
Deductible Business Days
For the CE days to qualify for deduction as business days, you must pass a facts-and-circumstances test that shows that your CE meetings provide specific business benefit to the conduct of your dental practice. The fact that the courses qualify for CE automatically says they are of bona fide benefit to your business.
Next, you need to establish that the principal character of your combined entertainment and business activity is the active conduct of these CE courses. We assume you are going to spend more time fishing each day than you are going to spend in the CE classes. That’s okay; the regulations specifically state that you don’t need to spend more time devoted to business than to entertainment.
Next, you need the CE courses to qualify the day as a business day. Before Public Law 96-608 changed the travel rules, a business day at a foreign convention was deemed by former Section 274 as attending at least four out of six hours of scheduled convention activity. Focus here on the four hours.
If the principal purpose of your day must be business, and if principal means more than half a workday (which is generally considered eight hours), then four hours and one minute of work would make your principal purpose for the day . . . work.
Thus, forget the two hours of CE a day and go for four hours and one minute or more.
Make sure that the courses take place in an educational setting—you might use a private room at the restaurant or in the lodge where you are staying.
We don’t know much about the three days, but for this answer we will assume that you spend three nights at the lodging facility. We will assume that you travel on day one, fish on days two and three, and return home on day four. Thus, we have you away from home for three nights.
In this case, you want the more than four hours of CE to take place on days two and three.
With this setup, you have
tax-deductible lodging for three nights,
tax-deductible travel costs to and from Alaska,
tax-deductible meals, drinks, and other costs of sustaining life during the three-day trip, and
tax-deductible entertainment with your fellow dentists.
As to your question about the location of the course, location is not a problem when the course takes place in the tax-defined North America area. In general, you may take the course in Alaska even when that same course is offered on that same day in your hometown. This is a long-standing rule.
Technically, the rule is that you have to have an ordinary and necessary business reason for your education and trip to Alaska. Your first reason is to be with 18 other dentists from your area in a close environment where you can gain substantial insights from the other dentists. If you did this in your backyard, it’s unlikely that you could create such a locked-in proximity to your colleagues.
50% versus 100% Deductions
Your other question concerned the check to the charter fishing company. The only problem this check poses is how much of the money is for fishing and how much is for lodging.
Keep these points in mind: The fishing is deductible as entertainment, and this type of entertainment produces a deduction for only 50 percent of the entertainment cost. Lodging is 100 percent deductible when incurred for CE purposes. (Lodging is not deductible at all if incurred for entertainment purposes—this is another reason to get business reasons for this trip correct.)
The strategy we set forth in this Q&A exceeds the standard set in Townsend, in which a company fishing trip passed muster as deductible. If you want to read Townsend, click on its name.
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