Q:What is the IRS definition of incentive travel?

A: No official definition exists, but incentives fall under the IRS classification of a "business vacation." Jim Gossett, partner with Arnstein & Lehr in Chicago, defines a pure incentive trip as "travel given as a prize for the accomplishment of set goals." The IRS rules apply whether the trip is for employees, customers, or independent contractors.

Q: Who shoulders the tax burden in a typical incentive travel program?

A: The award winners. "If the reward is given for business reasons, Gossett says, "the sponsor gets the full deduction for all expenses incurred in providing it. On the other hand, the person who gets the award has to pay taxes on the full fair market value of the incentive travel."

The incentive travel sponsor has to report the trip's value to the government and issue a W2 form to the employee (or 1099 to the nonemployee) who takes the trip. It's just like any other kind of compensation, treated as additional salary.

"Most of the complicated rules don't apply to incentive travel," Gossett says, "because you have somebody paying taxes on the full fair market value of the trip. With business travel, on the other hand, you may have a situation where the traveler isn't declaring the trip as income, and, at the same time, the company who pays for it gets a deduction of some sort."

There are also incentive trips that mix in a good deal of business, and in these cases, rules governing business travel may apply. Jonathan Howe, Esq., senior partner for Howe & Hutton Ltd. in Chicago, offers an example: "A trip to Germany for car dealers and their spouses, sponsored by the manufacturer and including a tour of the car manufacturing plant, has a dominant business purpose and won't represent compensation to the dealers."

Q: What is meant by "fair market value"?

A: "Let's say that I hire [a middleman, like an incentive company] to develop the program," Howe says. "He tells me it will cost $4,000 per attendee, but included in that cost is promotion, development, facilitation, and markup--none of which comes into play when figuring the fair market value of the award. I may pay the middleman $4,000 per head, but the actual cost of the trip is only $1,500 per attendee. As the sponsor, I have a $4,000 per person write-off, and the participant pays taxes on $1,500."Adds Gossett, "It doesn't matter how much the trip costs the sponsor, the fair market value must serve as the basis for taxes paid by the award recipient. The trip may have been donated to the employer from an airline, but as long as the company gives it to someone who has met certain goals, the company has to issue a W2 for the fair market value of the trip." The IRS says it will accept any reasonable estimation of fair market value.

Finally, incentive trip sponsors don't have to file 1099s unless the value of the trip (or any incentive award, excepting cash) equals or exceeds $600 in the course of one year. Recipients still are supposed to pay taxes on the awards of less than $600, but sponsors don't have to report it.

Q: Are there other instances where companies don't have to issue 1099 forms to incentive travel winners?

A: If the incentive travel reward goes to a company, with no proviso stating which person at that company is to receive the trip, the sponsor is not required to file a 1099. The company receiving the award, however, is still responsible for reporting the income. "On the other hand," Gossett points out, "if you're giving the trip to a corporation and you know the trip will be taken by a particular individual, the IRS says you're really giving it to a person and you must file a 1099. The burden of proof is always on the taxpayer. You have to convince the IRS that you're above board."

Q: Do the rules differ for travel taken outside North America?

A: No. With pure incentive programs, the sponsor must report fair market value of the trip as income to the recipient, whether the program is in the USA, Europe, or on a cruise ship.

Q: Is there a way to diminish the tax burden to qualifiers?

A: A practice called "grossing up" is one way some companies relieve the winners' tax hit. As Gossett explains it, grossing up means "paying the recipient some additional money so that he can pay the taxes.

"Of course, he'll pay taxes on the extra dollars you give him to pay the taxes, but the extra money reduces the bite. You still issue a W2 or a 1099 for the full amount."

For example, a company rewards its top performers with a trip valued at $6,000 and, to help the recipient pay taxes on the amount, it throws in $4,000 in cash. The award winner pays taxes on the full $10,000. As Gossett points out, "As a recipient, I'll be happy to take the taxable income versus no income at all."

Q: Some final advice?

A: Comply. Hospitality lawyers observe that the IRS appears more tenacious than ever. Quips Howe: "There's a difference between tax avoidance and tax evasion--about five to eight years. If you can substantiate [your deductions] with receipts, the IRS will probably give you a pass," he says. "But if you're greedy and a pig, just remember, hogs always get slaughtered."

FOUR MONTHS BEFORE QUALIFICATION PERIOD BEGINS * Create estimated budget.

* Decide on site, finalize contract.

ONE MONTH BEFORE QUALIFICATION PERIOD BEGINS * Coordinate announcement of site, qualification requirements, and promotion.

BEGINNING OF QUALIFICATION PERIOD * Create report that shows who is on schedule to qualify; begin regular promotion mailings.

SIX MONTHS OUT * Create detailed budget and monitor monthly.

* Confirm all billing arrangements.

FOUR TO SIX MONTHS OUT * Survey field associates on business agenda content.

* Develop objectives and themes.

* Decide on arrivals/departures for attendees with difficult travel schedules; communicate these itineraries to travel agent and attendees.

* Develop working agenda.

* Hold preconference site inspection.

* Choose ground operator.

* Send first logistical mailer to everyone on schedule to qualify.

* Finalize recognition/entertainment program. (Create recognition shell: a detailed outline of how, when, and by whom each winner will be recognized.)

* Begin banquet event order process.

* Begin planning audiovisual support.

* Develop vendor contact list and distribute to planning staff.

THREE MONTHS OUT * Finalize golf, tennis, and tours.

* Confirm and invite special guests and home-office attendees.

* Finalize business agenda.

* Finalize internal and external speakers.

* Send out speaker procedures, including on-site rehearsal schedule.

* Decide on postconference audiovisual objectives and plan accordingly (videotapes, cassette tapes).

END OF QUALIFICATION PERIOD * Send congratulatory, logistical, and recreation mailer and registration forms to field, home-office attendees, and guests.

* Confirm final qualifier report and other attendee names with management.

TWO MONTHS OUT * Check computer manifest of attendees against all registration/activity forms.

* Coordinate shipping of materials.

* Order supplies for on-site office.

* Order registration kits.

* Decide on and order signage.

SIX WEEKS OUT * Create printed program.

ONE MONTH OUT * Confirm all ground transportation.

* Print name badges/place cards.

* Order hotel amenities.

THREE WEEKS OUT * Send final logistics mailer.

TWO WEEKS OUT * Ship supplies and awards, and send the hotel a letter explaining shipment, including a list of box numbers and contents. (Deadline is earlier for international events.)

* Conduct home-office briefing.

* Send final arrival/departure lists to hotel and ground operator.

ONE WEEK OUT * Conduct on-site responsibility meeting with meeting staff.

* Finalize BEOs and confirm with hotel who can sign master account.

FIRST DAY OF MEETING * Send conference survey.

ONE MONTH FOLLOWING MEETING * Submit ASCAP/BMI fees.

* European Incentive and Business Travel and Meetings Exhibition (EIBTM): May 5 to 7, Palexpo Center, Geneva, Switzerland--Annual show with exhibitors from nearly 110 countries; for corporate incentive travel planners, mostly from Europe, with about nine percent from the U.S. Of some 7,500 attendees, half are hosted by the organization. Call: 44-1273-735253; fax: 44-1273-749539.

* Insurance Conference Planners Association (ICPA) Educational Forum: June 12 to 14, Four Seasons Dallas at Las Colinas. Annual educational weekend for meeting planners only, open to members and nonmembers of ICPA. Call Karen Hopkinson: (604) 988-2054; fax: (604) 988-4743; www.icpanet.com.

* SITE University of Incentive Travel, The Americas: June 17 to 21, Westin Mission Hills Resort, Rancho Mirage, Calif.--Annual educational event; SITE International Conference: December 12 to 16, Acapulco Princess Hotel, Acapulco, Mexico--Annual forum for discussion of incentive travel trends. Call: (212) 575-0910.

* The MotivationShow--Incentive Travel and Meeting Executives (IT&ME) and National Premium/Incentive Show: October 13 to 15, McCormick Place, Chicago--Annual show for some 20,000 buyers of incentive travel and premium/incentive merchandise. Call: (630) 850-7779; fax: (630) 850-7843; www.heiexpo.com/motivweb

Incentive planning bookshelf Incentive Travel: The Complete Guide, by Bruce B. Tepper (1993, Dendrobium Publishing, San Francisco, Calif.): $59 including shipping. Contact: Joselyn, Tepper & Associates, Inc. (602) 443-0098; fax: (602) 443-1760--An overview of the incentive travel pro-cess, from the differences between incen- tive travel and other incentives through pro- gram rules and organization, promotions, choosing the site, on-site operations, and more, including real-life samples of itineraries, promotions, and proposals. Although the intended audience for the book is incentive travel firms (with chapters on finding your incentive niche, prospecting and selling, and costing programs), most of the information is useful to corporate meeting planners as well.

Themes, Dreams and Schemes: Banquet Menu Ideas, Concepts, and Thematic Experiences, by G. Eugene Wigger (John Wiley & Sons, Inc.): $75. The 328-page book is available from the publisher at (800) 225-5945; use the reference code 063-8-6410--This hardcover reference is a real find, packed with party and theme ideas, covering everything from menu choices to decor and music selections.

How to Conceive, Set Up, and Manage Successful Incentive Travel Programs, by SITE as presented by Robert S. Dawson, CITE, edited by Lisa Oppenheimer (1995, MGI Management Institute, White Plains, N.Y.): $234.95 including shipping for SITE members ($189.95 if prepaid). Contact: MGI Management Institute (800) 932-0191, (914) 428-6500; fax: (914) 428-0773; www.mgi.org--A home study course divided into seven units. Each chapter includes explanations followed by skill development exercises to be answered and returned to an instructor/partner at MGI, who reviews and comments on the answers. Receive CEUs and a certificate for courses completed successfully.

The Incentive Travel Case Study Book, edited by Margie Markarian and Deborah Hauss (1990, SITE, New York) and Case Study Guide, edited by Bruce Tepper and Bill Becker (1991, SITE, New York): $30 for the book and guide for SITE members; $40 for nonmembers. Contact: SITE (212) 575-0910; fax: (212) 575-1838;

www.site-intl.org--The book covers 12 real incentive travel programs submitted by incentive travel planners from around the world, including information such as desired goals, strategies, program delivery, and post-program analysis. The workbook, designed to be used in conjunction with the book, asks several open-ended questions about each of the case studies (e.g., advantages and disadvantages of the approach taken, how the destination was suited to the group demographics), followed by detailed answers at the back of the workbook.

Incentive Travel Contract Handbook, by Jonathan T. Howe, Esq. (1995, SITE, New York): $20 for SITE members; $30 for nonmembers. Contact: SITE (212) 575-0910; fax: (212) 575-1838; www.site-intl.org--Provides three sample contracts to be used in incentive travel programs: with an incentive house, cruise line, and hotel. For each point in the contracts there is a "discussion" section, defining terms and outlining areas to be discussed, followed by the exact language of the contract clause. The contracts are not designed to be picked up verbatim, but to be used as starting points.