September 22, 2010
By Ralph E. Diodata, CPA, Automotive Dealership Services
Baseball is a mental game. This is one reason why I like the sport so much: I like a challenge. It’s no surprise that I became a CPA.
As CPAs, we face mental challenges on a daily basis. Items such as auto lease inclusions, state sales breakouts, and LIFO calculations are only a few examples of where governments can challenge the taxation of our clients. The latest challenge is figuring out how clients can deduct entertainment tickets.
Here is the rule from the IRS:
“No deduction is allowed for the cost of entertainment, amusement, or recreation unless that cost is either (1) directly related to the active conduct of a trade or business or (2) for entertainment directly before, or after, a substantial and bona fide business discussion associated with the conduct of that trade or business.”1
There are two key points from the language above. The first is the term “directly related.” The test for “directly related” is that the taxpayer must have had more than a general expectation of deriving income or some other business benefit at some indefinite future time. In addition, the active conduct of business must be the main aspect of the combined business and entertainment event. The other point is the term “associated with.” The test for “associated with” is that the meeting (sporting event, show, etc.) must entail a bona fide and substantial business discussion.
If you follow the rules, you can take a client to a baseball game and deduct up to half of the cost while keeping Uncle Sam safely on the sidelines.
Sports tickets usually fall under the "meals and entertainment" tax rules, which limit your deduction to 50 percent of actual cost. For example, if you purchase two $50 tickets to take a client to see a baseball game, your tax deduction will be $50. The math is simple: it's the paperwork that causes the problems.
"Documentation is crucial!" says Frank Pileggi, a partner with EisnerAmper LLP. "The problem is people don't write down what business was discussed before or after the game."
To deduct 50 percent of the tickets' face value plus the costs of food and beverages, you must have a written record of the following:
- the amount of the expense, including receipts
- the time and place of the entertainment
- the nature of the business that was discussed
- the business relationship between you and the person who was entertained
My advice to clients is to keep a detailed entertainment log.
Some businesses try, and fail, to deduct the full price of tickets as an "advertising" expense. If it's a ticket, it's entertainment. To deduct the full cost of tickets, there is a perfectly legal way to do so: hand over the tickets to clients or prospects as gifts. Bear in mind, tax rules do limit your deduction for gifts to $25 per recipient per year. In addition, the gift deduction can be claimed only if you do not attend the event with your client.
As you can see, baseball and taxation can both be mental games! But you will be safe as long as you follow the rules.
1 See Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Ralph E. Diodata, CPA, is an A&A supervisor at EisnerAmper LLP in Philadelphia, PA.