Travel agents

[oceanlovin'ea]

Can anyone give me some references where I can find information regarding the deductions available to travel agents?

I have a new client who has an online travel business and has 26 people working under her. She wants me to do a presentation for her group on what they can deduct in their business, especially in the area of travel and cruises.

I know the usual deductions but would like to be able to reference some things that would be specific to their profession.

Thanks for the references.

Linda F

[Corduroy Frog]

Industry Specific

Linda, if you are already aware of what you call the "normal" deductions, then what you are looking for is something specific to the travel agency industry, right?

One way to capture everything would be for all costs and expenses to be run through a business bank account, and (here's the tough part) keep it separate from personal activity. What SHOULD happen: everything which is an "ordinary and necessary" expense will transpire through the bank account. If they run personal items through, and someone has to sort out where each expenditure belongs, you're no better off than you started. Any personal draws should be identified as such.

Another possibility is for this business to incorporate. This sets the business apart as a separate entity, and forces more business deductions as well as other reasons for incorporation. But if they are still inclined to mix business and personal in their transactions, this won't make any difference.

Maybe some of the other members who may have travel agents for clients can provide you with specific line items that are common to the travel business.

[George Boutwell]

I have a new client who has an online travel business and has 26 people working under her.

You might want to call her former preparer to find out what kind of deductions she wanted to claim for her multi-level marketing scheme, that didn't pass the smell test.

I think you will find that she does not sell travel, but she sells the idea of being a travel agent. She would very much like you to show up and tell her downline buddies that yes, since they might sell a cruise to Greece someday, they can take one now to "familiarize" themselves with the trip, and deduct the entire cost.

Your participation takes her off the hook for any adverse consequences a few years from now, but may be hazardous to your reputation

[Bees Knees]

You might want to call her former preparer to find out what kind of deductions she wanted to claim for her multi-level marketing scheme, that didn't pass the smell test.

There are legitimate travel agents offering their services on-line. There is no need to assume it is a multi-level marketing scheme, and Linda, a long time poster on this message board, is smart enough to know the difference.

[oceanlovin'ea]

First of all, she has started the travel agent business this year. The "former" preparer is going to be former because it is June and she still doesn't have her corporate return for 2006 or her personal for 2006. They also have several months of her bookkeeping records that they have not returned to her. They don't answer her messages or return her calls at this point. So she is unhappy with them.

I have done her daughter's return for a few years and her daughter told her to call me.

Second, she has a website and does book quite a few trips herself. (She actually started a consignment shop and had her business cards on the counter for the travel business. She was making more money from the travel business than from the consignment shop. So she sold the consignment shop.) So she is actually a travel agent.

But this company also has the marketing plan to sign up others to be travel agents. She has done that because she has been successful with her sales and others want to do the same thing.

Travel agents are offered "FAM" trips by different cruise lines and resorts. They want you to come on their ship or to their resort. You are there mainly to check out their facilities, fill out questionaires, inspect facilities and services. They get a reduced rate to do this. The purpose of the trip is to be able to be knowledgeable and not just to get a cheap vacation. She said they also talk to people on the cruises about their website, pass out business cards and encourage them to check out their prices.

Would the cost of these trips be a deductible expense? Would it be deducitble for the travel agent's portion of the room but not the spouse or companion?

I will know more about her business after Friday. But I thought someone might know of a website or place that would have information regarding travel agents.

Linda F

[ChEAr$]

When in doubt,

Use Google search engine. Type in "travel industry tax deductions" and see
what turns up. Then vary the search terms if need be.

[George Boutwell]

(She actually started a consignment shop and had her business cards on the counter for the travel business. She was making more money from the travel business than from the consignment shop. So she sold the consignment shop.) . . .

Travel agents are offered "FAM" trips by different cruise lines and resorts. They want you to come on their ship or to their resort. You are there mainly to check out their facilities, fill out questionaires, inspect facilities and services. They get a reduced rate to do this. The purpose of the trip is to be able to be knowledgeable and not just to get a cheap vacation. She said they also talk to people on the cruises about their website, pass out business cards and encourage them to check out their prices.

So let's see .... she gets referrals from her consignment-shop business .... so she kills the goose that lays the golden eggs, by shutting down the shop. Reminds me of my client who went from food server to real estate agent, and earned lots of commissions on referrals from restaurant customers. When he stopped meeting new people, the referrals dried up. So now he's back to waiting tables (as well as selling real estate).

The travel industry will come up with lots of reasons to sell empty seats and empty rooms. One discount they offer is for the hundreds of thousands of customers who have some connection themselves with the travel industry. No one is losing money on these arrangements except for IRS, when agents earning $500 or less a year try to deduct $5,000 a year in travel. Sometimes, IRS figures out how to recover a lot of this lost revenue. Ever hear of "preparer projects" ? Take on 26 new "travel agent" clients, and you might.

If you drive a Lexus and it needs an oil change, can the technician who does it deduct the cost of his own Lexus because he needs to familiarize himself with the vehicle? If you answered "yes," then you are likely to answer "yes" to the question of "can a travel agent deduct all of her travel because she needs to familiarize herself with the world." If you're not sure, check out the court cases that define "ordinary AND necessary."

[Bees Knees]

If you drive a Lexus and it needs an oil change, can the technician who does it deduct the cost of his own Lexus because he needs to familiarize himself with the vehicle? If you answered "yes," then you are likely to answer "yes" to the question of "can a travel agent deduct all of her travel because she needs to familiarize herself with the world." If you're not sure, check out the court cases that define "ordinary AND necessary."

You are comparing apples to oranges. The tax code is not consistent. That would be like saying you can’t deduct the cost of a $10,000 business trip because the luxury auto depreciation rules under Section 280F limit the amount you can depreciate in the first year to $2,960.

Ordinary and necessary is open to interpretation. Yes, a travel agent can deduct the cost of a trip taken primarily as a business trip to establish vender contracts, travel routes, and other accommodations clients will need. What the travel agent cannot deduct is travel as a form of education under Section 274(m)(2), travel for investment purposes under Section 274(h)(7), and the expenses of a spouse who is not an employee of the taxpayer under Section 274(m)(3).

Making blanket statements that all travel agents are out to milk the system is an over generalization and simplification of the rules, and frankly not very helpful for a tax professional forum such as this one.

[Zee]

Can anyone give me some references where I can find information regarding the deductions available to travel agents?

I have a new client who has an online travel business and has 26 people working under her. She wants me to do a presentation for her group on what they can deduct in their business, especially in the area of travel and cruises.

I know the usual deductions but would like to be able to reference some things that would be specific to their profession.

Thanks for the references.

Linda F

Here's a link to a website trying to attract online travel agents. If you click on the tax benefits, you'll see how agents are recruited in the belief that they'll be able to write-off much of their personal travel and entertainment expenses...nothing new to everyone here, because each of us recognizes the limitations, etc.

http://travelagentinfo.com/

If you're going to prepare a presentation for travel agents, I'm certain you'll include all the necessary cautions so people aren't misled on the legitimacy of this approach, the requirements for proper documentation, and reasonableness.

[Bees Knees]

One court case that may shed some light on this: Leamy v. Commissioner, 85 T.C. 798.

One paragraph in the opinion is as follows:

“Without deciding, because it is not necessary to do so, we believe that many of the travel, transportation, and entertainment expenses here involved would qualify as ordinary and necessary business expenses of an independent travel agent. The "FAM" trips provide the agent with firsthand information with respect to the interesting things that can be seen and done at various places; the comfort, convenience, and condition of facilities at those places; the cost and availability of transportation to and from those places; the types of people and services the traveler can expect; and many other things that will be of interest to a prospective customer. Such information can be converted into income from sales of the services a travel agency sells to the public. A personal knowledge from experience with the ski slopes in a particular area may well convince a skier-customer to visit a particular area the agent is promoting, rather than some other area the skier has heard of. And the utilization of knowledge acquired on trips in speaking to groups contemplating tours may also produce revenue for a travel agent.”

The taxpayer in the court case actually lost the deductions, due to other issues. But the court did give its opinion that if those other issues were OK, FAM trips in themselves by a legitimate travel agent are allowed as ordinary and necessary business travel deductions.

[Zee]

One court case that may shed some light on this: Leamy v. Commissioner, 85 T.C. 798.

One paragraph in the opinion is as follows:

“Without deciding, because it is not necessary to do so, we believe that many of the travel, transportation, and entertainment expenses here involved would qualify as ordinary and necessary business expenses of an independent travel agent. The "FAM" trips provide the agent with firsthand information with respect to the interesting things that can be seen and done at various places; the comfort, convenience, and condition of facilities at those places; the cost and availability of transportation to and from those places; the types of people and services the traveler can expect; and many other things that will be of interest to a prospective customer. Such information can be converted into income from sales of the services a travel agency sells to the public. A personal knowledge from experience with the ski slopes in a particular area may well convince a skier-customer to visit a particular area the agent is promoting, rather than some other area the skier has heard of. And the utilization of knowledge acquired on trips in speaking to groups contemplating tours may also produce revenue for a travel agent.”

The taxpayer in the court case actually lost the deductions, due to other issues. But the court did give its opinion that if those other issues were OK, FAM trips in themselves by a legitimate travel agent are allowed as ordinary and necessary business travel deductions.

What were the other issues? I certainly would agree that FAM trips, etc. could be considered ordinary & necessary for agents actively engaged in the travel business with a profit intent. I think many of the problems arise when new agents are provided information that suggests that a "sideline" business with little (if any) profit motivation will still allow them to deduct many personal expenses. That's partly why the "Dream Team" of "Tax Rennisance" shut down by the IRS and FBI. The information and tax saving sales kits they provided was accurate to a point, but misleading in application. I like the tax benefits home-based businesses provided, if fully in comformity with the tax laws.

[Bees Knees]

What were the other issues?

The travel agency was a corporation owned by the taxpayer. The taxpayer incurred travel expenses in connection with his corporation, however, he took no salary from the corporation. The court ruled that the taxpayer was not a separate independent travel agent. The corporation was the travel agent. You cannot deduct expenses that belong to your corporation, and you cannot deduct your own employee business expenses if you are not an employee of the corporation.

[Zee]

The travel agency was a corporation owned by the taxpayer. The taxpayer incurred travel expenses in connection with his corporation, however, he took no salary from the corporation. The court ruled that the taxpayer was not a separate independent travel agent. The corporation was the travel agent. You cannot deduct expenses that belong to your corporation, and you cannot deduct your own employee business expenses if you are not an employee of the corporation.

I'll have to read the case. If I understand your response correctly, he attempted to deduct the expenses as an employee business expense. It suggests that you can't be an employee without a salary? Often, single-owner S-Corporations are in significant loss situations in the early years and simply don't have the cash-flow to pay the owner a salary. I don't think I've ever read you have to be paid wages to be an employee. It's not unusual for companies to continue to operate without paying wages during lean times. Why didn't the Corporation just pay the expenses directly, or maybe the owner should have loaned the Corporation money?

[jainen]

it did NOT give an opinion

>>But the court did give its opinion that if those other issues were OK, FAM trips in themselves by a legitimate travel agent are allowed as ordinary and necessary business travel deductions.<<

No, it did NOT give an opinion that such trips are allowed. The court specifically stated that it was not deciding that question. The rest of the paragraph is speculation about issues that could be successfully raised in other circumstances.

Apply the same tests as any other business travel. Is it PRIMARILY business in nature, especially considering time spent in business activities other than the travel itself? Is there a REALISTIC expectation of profit? Are the expenses reasonably PROPORTIONAL to the income generated?

[Bees Knees]

No, it did NOT give an opinion that such trips are allowed. The court specifically stated that it was not deciding that question. The rest of the paragraph is speculation about issues that could be successfully raised in other circumstances.

Same thing. In other words, if the other issues were not issues, that is the way the court would have ruled. That is why it gave your so called non-deciding speculation under the heading; "Opinion".