Reducing Tax Implications of Incentive Travel Programs

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This week WESCO is taking 800+ people on an Alaskan cruise as part of their WESCO VIP incentive program. It looks like an exciting adventure (check out this pre-program video and follow them on their program Instagram page or on PicDeer) for probably 250+ contractor customers (plus spouses, extra trips earned), salespeople / corporate staffs and spouses as well as sponsoring suppliers.  Alaska is costly but the program generates significant incremental revenue.  And then there is the tax bill … to participants who will receive a 1099 and potentially to the company.

Many distributors run incentive programs and many of these programs are travel related.  Why? Because they help increase sales and provide a marketing platform for a company.  Additionally, they help strengthen relationships with contractor ownership and project managers Do you run a trip program for your customers or salespeople? Concerned about potential increased tax implications?  Here’s some ideas to help mitigate your exposure:

Ask for line item costing

Identify which costs are truly travel costs and which costs could be reclassified, enabling them to be expensed differently and hence avoiding travel / entertainment related tax consequences, legally.

Consider:

  • The provider’s profit margin, which they are entitled to, could be reclassified as a management fee. After all, an incentive program is an arranger of an event, not a producer of a product.
  • The cost for issuing an airline ticket is a management fee.
  • Onsite trip directors are on-site consultants and hence travel consultants.
  • Registration costs are data management fees.
  • A/V costs should be appropriately billed as marketing expenses, or, if you are having meetings (or talking to your audience), then a training expense.
  • Signage and pre-trip communication materials should be billed as marketing expenses.
  • What, if any, costs could be allocated to training activities? (for sales or customers)
  • The hotel, and sometimes airlines, provide complimentary services or incentives such as one one free room night for every 50 purchased.  If your incentive company doesn’t mention, ask.  These should not be used as an off-set for trip directors. This should be an off-set towards your travel participants / corporate staff. Let the incentive company bill the cost as it is part of their on-site consulting fee (no different than if you are paying for the travel expenses of a consultant).

Doing these steps will help you reduce the fair market value of your trip which is what is noted on the 1099 (and ask for the customer’s Federal EIN or Social Security number – Federal EIN is better so “expense” goes to the company, not the individual) that you need to issue to customers and/or the W2 impact that should be grossed up for direct employee trips / sales incentive programs.

As it relates to the larger costs of travel hosting – hotel, food, entertainment – these need to adhere to your tax attorney’s advice.

Some other things to consider (and some of this may change based upon the destination):

  • Does it offer a VAT (value-added tax) refund based upon your classification of the event? Can you qualify if you have a short supplier presentation (a meeting)?
  • What happens if you have a small company / sales meeting prior to or during the incentive program? Can this be considered a meeting for your staff?
  • Consider your staff that attends the program to act as hosts. How can these individuals’ cost be handled as this expense is not an “entertainment” expense but a corporate expense (and yes, spouse involvement may still require separate tax notification, however, their cost should be limited to any incremental costs … i.e. food, as the hotel room would still have been needed for one person.)?
  • If the hotel offers “meeting event planner” points, make sure that you ask your event planner for them?
  • Ideally place airline ticket costs (deposits and the actual tickets) on a credit card (individual or corporate).  It helps provide incremental cash flow and earns points for you / the company.
  • Consider how you can allocate supplier solicited funds to travel expenses. Perhaps a supplier “sponsored” an activity or a meal? Invoicing can effectively assist this as there is then a paper trail. Worst case it can reduce the overall cost of the initiative and then the remaining costs can be allocated on a “per winner” basis.

The above will help you reduce the fair market value of your incentive travel program, on a per person basis, by 12-26%, exclusive of any VAT savings.

And, conceptually, the same works for merchandise (including gift cards) incentive award programs.  Incentive companies have margins of 20-30%. Sounds high but, for many, this also includes shipping, insurance, sales tax and then operational expenses and their net profitability.  Ask them to unbundle the costs so you can identity each element and allocate accordingly to reduce the fair market value of an award (you should be issuing 1099’s to customers for fair market value over $600.)

While I’ve used many of these initiatives before, and they are valid, if you have any concerns, coordinate with your finance department and/or tax advisor.

The above is designed to shed light on how you can reduce tax consequences for your company and your customers. Many manufacturers also support incentive programs that drive growth which can further help a distributor reduce their overall investment … but should not supplant the investment. Any strategy needs to be a win for the customer, a win for the distributor AND a win for the manufacturer.

Unfortunately, the change in the tax code necessitates marketers thinking about tax consequences as CFOs and senior management consider the cost of incentive programs.  The return is there for these programs based upon Channel Marketing Group’s extensive involvement in structuring and operating incentive programs. These budget allocation concepts are offered as ways to help companies and their customers. While your incentive company may comment about extra work, they should accommodate given your importance to them.

How Channel Marketing Group Can Help

Seeking a strategy to accelerate growth with contractors (and yes, there are incentive initiatives that can work for industrial and institutional accounts)? Give us a call.  If you\’re a manufacturer, these strategies can work with your sales organization (President\’s Club concepts), distributors (principals, branch managers, distributor salespeople and integrating to focus on target accounts) and potentially contractors (frequent buyer programs and promotions) and can also be designed as account-based initiatives to work with selected distributors. Reps can also design smaller strategies to support their key lines.

We have experience in structuring and managing incentive programs for distributors and manufacturers. From small $15 million companies to billion-dollar distributors and manufacturers. In the electrical industry as well as 50+ other industries.  We provide an unbiased approach as it is consulting-driven. We don’t sell awards but can conduct an RFP process and/or solicit fulfillment quotes and other ideas from a handful of quality incentive providers. Let us know if we can help.

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2 thoughts on “Reducing Tax Implications of Incentive Travel Programs”

  1. This is great information. Being able to guide the customer and help in any way to reduce the tax implications provides a great service to our clients operating these programs. These questions arise all the time.
    Tom

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