Business Meetings What is the IRS definition of a business meeting? A: The IRS says a business meeting is an event where "the taxpayer [whether it be the sponsor or attendee] is benefiting or advancing the interest of his trade or business." Business must be the primary purpose for attendance.
"I want you to emblazon in your memory the three words: trade or business," says Jonathan T. Howe, Esq., senior partner for Howe & Hutton Ltd. in Chicago. "Everything you do at a meeting should reflect back to its importance toward attendees' trade or business." Planners organizing medical education meetings must use this mind-set because they will want to maximize the opportunity for attendees to get the highest deduction available to them for their participation.
According to the recently reissued Meeting Professionals International (MPI) U.S. Meetings & Taxes guide, any meeting that is an official part of a convention or other business gathering-lectures, panel discussions, committee meetings, product displays, or similar activities-and conducted by a business or professional organization, qualifies as a "substantial and bona fide" business discussion.
What meeting expenses are deductible? A: All meeting costs-including food and beverage, lodging, travel, entertainment, and recreation-can be deducted by the taxpayer if the items are directly related to the "active conduct of business or directly preceding or following a substantial and bona fide business discussion," according to the IRS. The cost of business meals and entertainment expenses, however, are subject to a 50 percent deductibility limit, thanks to the Tax Act of 1993, which took effect January 1, 1994 (before that they were 80 percent deductible).
"It all really boils down to the primary purpose of the trip," explains John Foster, an Atlanta attorney specializing in the legal aspects of meetings and travel. "If the primary purpose of the trip is to transact business, the company can deduct all costs of travel, plus lodging, plus 50 percent of meal and entertainment expenses-even if the attendee spends some of the time vacationing."
However, personal expenses and activities that aren't part of the convention are not deductible. For example, says Foster, "if an attendee at an Orlando convention goes to Universal Studios on his own, the money spent at the theme park is not
deductible."
What are the key tests for a meeting's deductibility? A: For a meeting to be deductible (either for a sponsor or an attendee) attendance 1) must affect or enhance a person's trade or business, 2) must be "ordinary and necessary," and 3) cannot be "lavish and extravagant." A fourth consideration is documentation. Receipts, conference brochures, plane tickets, and other back-up materials must be on hand.
What does the IRS mean by "ordinary and necessary" and by "lavish and extravagant"?
A: The IRS does not publish written definitions for either phrase. Common sense rules. "If you're an executive, then it makes sense that you entertain people as part of your business," says Foster. "But it probably would not be ordinary for a secretary to take someone out for a business
discussion."
But while a meal may qualify as "ordinary," it's deductible only if the amount paid isn't lavish and extravagant. "Even if it's not lavish, you're entitled to deduct only 50 percent," explains Jim Gossett, partner with Arnstein & Lehr, a Chicago law firm, and the general counsel for the Society of Incentive Travel Executives.
"But if I take a client to a terribly extravagant restaurant and I pay $100 for a meal, the IRS might say that the reasonable amount should be $50, and therefore I get to deduct $25 since the cost of business meals and entertainment is only 50 percent deductible."
What's extravagant? "The IRS has never really given a lot of guidance on this," Howe says. "But don't do what one meeting planner did and explain in your program literature that 'this will be the most lavish and extravagant event you have ever attended.'"
Are there other considerations regarding meal and entertain-ment deductions?
A: Yes. The best advice might be: Don't talk with your mouth full, but if you do, make sure it's about business. According to the IRS, business must be discussed before, during, or after the meal. And participants must note the topic of discussion in their records. The 50 percent deductibility rule, incidentally, applies to meals, taxes, and tips.
The 50 percent rule, however, does not apply to incentive travel at all, because the attendee will pay tax on the full fair market value of the trip, including meals .
What about pre-con and post-con tours? A: "If you vacation or take a side trip near the city in which you do business, that part of the trip is not deductible," says Foster. "However, your expense to get to the place of business is still deductible."
How do you prove that the primary purpose of a meeting is business? A: Simply by good documentation. "Keep records of how time was allotted and what brought you to the meeting in the first place," says Kim Zeitlin, senior partner with Zeitlin and Dorn, a Washington, DC law firm specializing in hospitality law. "For example, if you were there for a business seminar and there was an incidental cocktail party, the brochure would substantiate that.
"The IRS looks at a number of different factors in deciding whether or not attendance is primarily for a business purpose," Zeitlin continues. These include the amount of time spent on business activities versus pleasure or nonbusiness activities, the venue of the meeting, and who
attended.
Proof is in the receipts, plane tickets, conference brochures, and even tickets to individual seminars. For physicians attending continuing medical education (CME) courses, the Category 1 credit documentation is part of the proof-as long as the primary purpose of the trip was to attend the meeting at which the the CME credit was obtained. A vacation disguised as CME activity is still a vacation-and not deductible.
As of October 1995, companies or travelers must provide receipts for all business expenses over $75 (no longer $25).
How long should you keep these records? A: "The statute of limitations on tax audits is seven years," Foster says. "If there's fraud involved, however, there's no statute of limitations."
Are the deductibility rules different for international meetings? A: A "foreign convention" is defined by the IRS as a convention, seminar, or similar meeting held outside the North American area. (For an updated list of what's considered the North American area, see box above.)
If meetings convene outside the North American area, the burden of proof is more stringent for planners and attendees. In order for a business meeting to be a tax deductible expense, taxpayers must show not only that the primary purpose of the trip was to conduct business, but, Foster says, "you're also stuck with another thing: proving that it was just as reasonable to hold the meeting outside North America as it would be to hold it inside."
For medical meeting planners, having an international medical association invite their group's participation in an offshore meeting is one possible means of justifying the trip, since the invitation implies travel outside the United States-just as long as the primary purpose of the trip is to attend the meeting, not to go sightseeing.
Howe adds, tongue firmly in cheek, that one justification for overseas travel that the IRS often allows is simply that the organization has done it before.
Other important international-meeting rules: "If you're taking the business trip as an employee or as a managing executive or self-employed person, the rules are different," Foster says. The business trip abroad is fully deductible if the primary purpose is business and you did not have control over the assignment of the trip-in other words, if you're an employee and you were told you had to go.
However, if you're a managing executive or self-employed person, or if you have ten percent or more ownership in the business, you can deduct all business transportation costs if the trip outside the USA took a week or less.
"If the trip lasted for more than a week and you spent less than 25 percent of your time (measured by the total number of days) on vacation or other personal activities, it's still deductible. But if it's more than 25 percent, the IRS can deem it a vacation . . . then you have to allocate expenses between the time spent on business and time spent on personal activities," Foster says.
How can medical meeting professionals help attendees improve documentation of business activities? A: Planners should be very specific in all literature for their courses, conferences, and seminars about the importance of the meeting, with language and descriptions underlining how sessions will advance participants' trade or business.
Howe reminisces about the "good ol' days, when eight-page conference bro-chures had seven pages advertising golf, tennis, and shopping opportunities. Then, on page eight, they said, 'Oh, by the way, we're also having a meeting.'"
Tax experts also recommend including a disclaimer in the meeting literature-conspicuous in size and in boldness-stating that the meeting may be taxable or nondeductible in whole or in part, and that attendees should "consult a tax advisor."
What are the rules governing deductions for spouses and companions who attend a meeting?
A: For the travel expenses of an accompanying spouse to be deductible, there must be a clear business purpose for attendance and-new with the Tax Act of 1993-he or she must be a bona fide employee of the taxpayer claiming the deduction. This rule also applies to a companion or child. The IRS is "really cracking down on spouse travel," notes Arnstein & Lehr's Gossett. "The change in the law made it easier for them to do that, and now they have the ammunition to go after people." Add to this the fact that "the law is unfamiliar to a lot of people as it stands, and they're still taking spouse deductions that would have been accepted under the old rules," he says.
Some final advice?
A:Comply, comply, comply. Hospitality lawyers observe that the IRS appears more tenacious than ever. "There's a difference between tax avoidance and tax evasion," Howe quips. "It's 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 a greedy pig, just remember, hogs always get slaughtered."
Section 274(h) of the Internal Revenue Service code limits deductions for expenses incurred in connection with a convention, seminar, or similar meeting held outside the "North American area." Countries within the North American zone are:
* The 50 states of the USA and the District of Columbia
* Possessions of the USA (American Samoa, Baker Island, Puerto Rico, Northern Mariana Islands, Guam, Howland Island, Jarvis Island, Johnston Island, Kingman Reef, Midway Islands, Palmyra, U.S. Virgin Islands, Wake Island)
* Canada * Mexico * Trust Territory of the Pacific Islands (Palau) * Marshall Islands * Micronesia * Barbados * Bermuda * Costa Rica * Dominica * Dominican Republic
* Grenada * Guyana * Honduras * Jamaica * Saint Lucia * Trinidad and Tobago
Taxes and Incentives, by Jonathan T. Howe, Esq. Can be ordered through Howe & Hutton, Ltd., 20 North Wacker Dr., Ste. 3550, Chicago, IL 60606-9833; (312) 263-3001. Available in June, price TBD.
U.S. Meetings & Taxes, third edition, by Jonathan T. Howe, Esq. Available through Meeting Professionals International (MPI) Bookstore, (214) 712-7744; $12 for MPI members and $22 for nonmembers.
Tax Code: U.S. Master Tax Guide, published by Commerce Clearing House, (312) 866-6000, $29.95.
Federal Tax Handbook, published by Research Institute of America, (212) 645-4800, $28.95.