Interpreting the tax code related to incentive travel can be daunting. Here are some simple and straightforward guidelines:
The recipient of a pure incentive trip — one where the trip is being taken primarily for pleasure — is responsible for paying taxes on the fair market value of that trip (the cost of airfare, hotel, ground transportation, etc.). Some companies award a cash bonus to help offset the taxes that will be owed by the recipient.
The company gets a dollar-by-dollar deduction on the cost of the trip. “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,’” says Jim Gossett, general counsel for the Society of Incentive & 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, both to the employee and the IRS.
For more information, visit www.irs.gov, or call (800) 829-1040 to order publications 463 and 535.