INTERPRETING THE TAX code related to meetings can be a daunting task. But what it boils down to for incentives is that the recipient of a pure incentive trip — one where the trip is being taken primarily for pleasure — is responsible for paying the taxes on the fair market value of that trip; that is, the typical cost of airfare, hotel accommodations, ground travel, etc. Some companies award a cash bonus along with the trip to help offset the taxes that will be owed by the recipient.
The company gets a dollar-for-dollar deduction for the cost of the trip. (This also applies if the award includes a spouse or significant other.) “There are no per-person limits on the pure incentive side as long as they are deemed ‘ordinary and necessary’ business expenses and aren't ‘outrageously lavish or extravagant,’” notes Jim Gossett, general counsel for the Society of Incentive and Travel Executives.
The recipient of the trip reports it as income to the IRS on Form 1040, again based on fair market value. The company reports it on the W-2 form, both to the employee and to the IRS.
For more information, log on to www.irs.gov or call the IRS at (800) 829-1040 and ask for Publication 463 and Publication 535.