Organized outings like sporting and entertainment events provide opportunities for networking, promoting and strengthening local businesses. When organizing all of the details surrounding one of these events, tax implications are usually the least of a person’s concerns. However, giving proper consideration to how an event will be treated for tax purposes can prove beneficial when tax planning. For the purposes of this article, the term “taxpayer” refers to a business that would be deducting sports and entertainment expenses on its tax return.
The discussion regarding the deductibility of sports and entertainment event expenses begins with whether the event is directly related to the conduct of the business. These expenses typically include athletic events, theatre productions and other similar events. In order to determine this, the taxpayer must determine if there is an expectation to receive income or other benefit at some time in the foreseeable future from a person or group in attendance. In order to be directly related to the business, the taxpayer must also have a business relationship with the person or organization being entertained and the business discussion must be the primary reason for attending the event.
If a legitimate business discussion takes place either before or after the event, the associated entertainment expenses may still be allowable. Included in these types of expenditures are expenses to obtain new business or strengthen existing business relationships. As mentioned in the previous paragraph, the business discussion must be the primary reason for attending the event. However, it must also represent an active effort by the taxpayer to obtain income or other business benefit. In either scenario, when the expense is deemed “business related,” the allowable portion of entertainment expenses is generally limited to 50 percent.
A few exceptions to these rules relate to expenses for company events and club dues. Expenses relating to company-wide events are typically not subject to the entertainment rules mentioned above and are 100-percent deductible. Membership dues to belong to a business, social, athletic or sporting club are generally not deductible. However, dues may be deductible if paid to a professional or public service organization, are for business reasons, and the organization does not conduct entertainment activities for members or guests.
Meals are a common companion to any entertainment or sporting event. The tax treatment of entertainment-related meals is typically the same as for the event, but there are a few caveats. For example, the taxpayer or employee must be present at the meal, and expenses for lavish or extravagant meals are not allowed. The same 50-percent limit applies to meals. However, this percentage must be applied once lavish and extravagant items have been removed from the expense total.
The 50-percent limitation does not apply to the cost of a ticket package, including the meal, if the event is organized to benefit a tax-exempt organization, if all net proceeds are contributed to such an organization, and if volunteers perform the majority of the work in carrying out the event. Let’s say a business purchases several tickets to attend a golf tournament organized and run by the local volunteer fire department. All net proceeds from the tournament will be used to buy new fire equipment. The entire cost of the tickets would qualify as a business expense and be 100-percent deductible. On the other hand, if the fire department paid individuals to run the tournament, only the face value of the tickets would be eligible for deduction and be limited to 50 percent.
Skyboxes or luxury suites are a common place for business associates to meet during sporting and entertainment events. They can be found in most arenas or stadiums and are great places to host a business-related event or company outing. One item to keep in mind is whether a suite or skybox is rented for more than one event. The allowable expense for a multi-event rental may not exceed the fair market value of the ticket price charged for the highest value, non-luxury box seats. The taxable deduction for the event would be limited to 50 percent of the aforementioned allowable expenses.
Charitable contributions are a great way to support local, eligible organizations. If charitable contributions are given to a collegiate institution and the contributions allow the business the right to purchase season tickets for any sporting event taking place at the institution’s arena, the charitable contribution deduction is limited to 80 percent of the total amount given. The other 20 percent is classified as an entertainment expense and subject to the general rules mentioned earlier.
Clearly, the world of entertainment and sporting event-related business expenses is complex, but generally speaking, the key is whether the various transactions deal with legitimate business discussions and transactions. Any event that may be construed as unnecessary or excessive is generally not allowable as a deduction. Understanding how these types of events are recorded and taxed can provide participating businesses foresight to their potential tax burden. This knowledge also allows businesses to better evaluate and weigh the benefits offered by these types of events. For a greater understanding of the tax implications of your next business event, contact your tax advisor. iBi
Matthew R. Berlinger is a staff accountant at Heinold-Banwart.
He can be reached at (309) 694-4251 or [email protected].