As you can imagine, the ability to deduct travel for
"research" draws some IRS scrutiny.
1. You can demonstrate that you have an ongoing business as a travel agent,
2. You did the travel specifically to help your business (such as visiting places that you may want to send clients to),
3. You can show that this travel was not conflated with other purposes (personal enjoyment, places you would never send clients to, modes of transportation that you don't specialize in, etc.)
4. You don't try to deduct expenses for a family member or friend,
then you should be able to deduct this travel as a legitimate business expense.
But maintaining good records is critical.
For example, if you take a cruise, you need to demonstrate that selling cruises is an ordinary part of your business, that you were not reimbursed for the trip (such as if the cruise line has you aboard for free or at a discount), or that it is credible that you are about to sell cruises.
To remind yourself how important documentation is, read this court case.
So I completed an audit review by the IRS - they are disallowing my "FAM" trips - which meet exactly the criteria you've provided here. The IRS claims this is related the tax code in section 274 - Disallowance of certain entertainment, etc expenses effective as of 12/22/2017. They claim that these FAM trips are considered "education" and therefore not deductible, even though I use them to both service existing clients and to build new business/obtain new clients.
First, I must note that I wrote this answer on March 30, 2017 in reference to a question for tax year 2016. Unfortunately, since all the dates of postings here have been changed to the date that the posting was copied from the old forum to the Community, it is not possible for you to easily discern what tax year the answer is for. This will lead to understandable confusion on the part of readers.
Second, I wrote this answer from the point of view that the travel agent was self-employed. This is what I meant by item #1 - "you have an ongoing business as a travel agent." So, are you an employee of a travel agency (W-2) or self-employed?
Third, the answer from the IRS that you are giving me is puzzling, to say the least. The code reference is to Section 274 (m)(2): "Travel as form of education
No deduction shall be allowed under this chapter for expenses for travel as a form of education." (https://www.law.cornell.edu/uscode/text/26/274 ). But this paragraph refers to the attempt to travel for fun and being to deduct, say, if you traveled around Europe for three weeks for vacation and tried to deduct it because it was "educational" (well, it is, in a way).
However, at the beginning of Section 274, the code clearly states: (you can deduct) "An activity described in section 212 (which) shall be treated as a trade or business." Section 274 (a)(2)(B) at the link above. Section 212 is very short and most importantly says, "In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—for the production or collection of income..." See https://www.law.cornell.edu/uscode/text/26/212
If you have a Schedule C business as a travel agent, and expenses for FAM trips are "ordinary and necessary" (see Section 212) in the travel agent industry (as I believe they are within limits), then I see no reason for the IRS to call them educational, unless you were unable to prove that these expenses were directly related to the production of income (or perhaps you didn't know that you needed to).
As for the reference to the Tax Cut and Jobs Act of 12/22/2017, this is referring to the following: "The 2017 TCJA eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation." (See https://www.irs.gov/newsroom/irs-issues-guidance-on-tax-cuts-and-jobs-act-changes-on-business-expens... ). Again, your FAM trips, if done to further the production of income in your business, should not be considered "entertainment, amusement or recreation", but instead are "ordinary and necessary" business expenses. This is easier to argue if you are a Schedule C filer and not an employee, because the Tax Cut and Jobs Act disallowed a large number of employee business expenses starting in tax year 2018.
Now, I am answering somewhat in the dark, because I do not know which tax year was audited, I don't know what the audit letter said, I don't know if you had an office visit and what was said there - all of which might alter my response to you.
However, on the face of it, if these FAM trips are an ordinary and necessary expense for your Schedule C business (you should be able to get supporting data from your industry's trade association), then they should be deductible - at least to a large extent.
If the IRS has already made some sort of determination, you may be well advised to consult a local Enrolled Agent or CPA to represent you to the IRS in any appeal. Enrolled Agents are empowered to represent any taxpayer on any tax issue before any office of the IRS. Since they are enrolled and regulated directly by the IRS, they would likely be able to address your situation (of course, you want an EA with practical experience in audits, as not all of them do it - ask). Ditto with CPAs - they are all able to represent you, but many CPAs don't do tax (there is a lot to the world of accounting besides tax accounting) or if they do, don't do in-office audits. Again, ask.
To find a local Enrolled Agent, please go to https://taxexperts.naea.org/ . To find a local CPA, look them up in your local Yellow Pages or your state CPA registry.
Thanks for the prompt and thorough response.
A few clarifications based on your reply:
1 - This is for tax year 2017.
2 - My wife and I are an LLC with no employees so we file via Schedule C.
3 - We both take the FAM as we are both registered agents via IATA.
4 - I believe we were flagged as we had a loss for 2017 and the bulk of the expenses were travel-related (as you would expect from a travel agency).
5 - We're taking your advice and seeking help from a CPA to contest the IRS charges.
6 - Any other thoughts or suggestions?
Another note is the IRS will look at intent to make a profit. Seems many folks are getting licenses and travelling are writing travel blogs and claiming schedule C losses.... If you don't show profits within 5 years... the IRS will normally say it's personal and not business intent. Many people try to claim truly personal expenses as business and it is up to you to prove business intent over personal... Good luck.
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1 - This is for tax year 2017 - this makes it all the puzzling that the IRS would have mentioned the Tax Cut and Jobs Act passed in December of 2017, because nearly all of its provisions took effect on January 1, 2018, for tax year 2018, not 2017.
2 - My wife and I are an LLC with no employees so we file via Schedule C - I assume that you two live in a community property state so you can treat your LLC as a sole proprietorship (i.e., Schedule C). However, it seems that your spouse also works for the LLC; in this case, you two would file two Schedule Cs, with the business's income and expenses divided between you. This is so each of you gets the appropriate credit for Social Security and Medicare taxes paid (this is what the self-employment taxes are).
3 - We both take the FAM as we are both registered agents via IATA - See the note about two Schedule Cs above.
4 - I believe we were flagged as we had a loss for 2017 and the bulk of the expenses were travel-related (as you would expect from a travel agency) - It's difficult to know why you were audited, given that so many are at random. However, maglib above may be correct that too many Schedule C losses may have triggered it.
5 - We're taking your advice and seeking help from a CPA to contest the IRS charges - Good.
6 - Any other thoughts or suggestions? Since you are seeking local competent advice, I will bow out at this point. Since I assume your local tax professional will ask to see your three previous tax returns (at least), he/she will be able to see much more detail than we can on this forum.
Just completed another meeting to review situation - here's the latest:
- Seemed to be able to convince on education vs. experience gained from FAM's - but not entirely - the IRS countered with the "Lee vs. IRS" court case - they didn't like any trip taken without a client present - how do we prove the trip was for a booking (didn't really care if the booking was in the future/planned)? So the 3 areas we needed to prove in your initial blog comments above didn't work
- Biggest issue seems to be losses for tax purposes (so they've now changed their argument)
- Now looks like we'll need to reduce loss for 2017 and avoid any future losses
- Key lesson - don't have any losses - otherwise they'll dig until they find something
Thanks for the follow-up. It is difficult to know what "Lee vs. IRS" refers to, although there is an old Supreme Court case (1981) of the United States vs. Lee, in which an Amish employer is held liable to collect Social Security taxes on his employees, even though the Old Amish are exempted from paying Social Security taxes themselves when self-employed, for religious reasons. See https://caselaw.findlaw.com/us-supreme-court/455/252.html
I am thinking that this is not the case the IRS agent was referring to.
But I confess to assuming that you were making money at this business. As you saw above, I said, "You can demonstrate that you have an ongoing business as a travel agent".
A key identifier of an "ongoing business" is that it make money (at least most years). Otherwise, the business starts to look like an effort to avoid income taxes on your other income while avoiding any self-employment taxes.
I am glad that you retained a local tax advisor. As I noted, we here at the Community are limited in how much we can know of a questioner's situation. Good luck.