Entertainment expenses must pass tax tests of the IRS
With Race season upon us once again, it's time to consider the tax status of the business-related purchases of seats to the Indy 500, NBA playoffs, and like events.
Purchasing event tickets under the guise of a business expense falls into the category of entertainment, an area of the tax law that piques the interest of many a hungry IRS agent.
To be deductible as a business entertainment expense, event tickets must be considered an ordinary expense, which is to say that other people in your line of business would not be surprised that you are entertaining your clients and customers in this way, because they probably do it too.
If your expense passes the ordinary test, you get to go on to the necessary test. The IRS considers an entertainment expense to be necessary if it is helpful and appropriate to your business. A helpful expense is one that will eventually generate additional income or perpetrate existing income. An appropriate expense is one that you deem appropriate to your type of business and the people you are entertaining. For example, it would be appropriate for a business owner to entertain the customers who keep him in business. It would not be appropriate for a clerk in a retail store or the person who stocks the shelves after hours to do the same.
The final test is an either or test. To be deductible, the entertainment expense must be either directly-related to your business or associated with your business.
Your race or play-off tickets are directly related to business if the main purpose of the event is to conduct business, if you engaged in business while at the event, and if you have a reasonable expectation of generating income as a result of the attendance at the event. Yikes! I thought we were here to watch the Race!
If you don't meet the directly-related test, all is not lost. The event tickets can still be deductible if there is a clear business purpose for attending the event. That purpose can be to get new business or to keep your business associates happy so that they will continue to give you their business.
However, don't just take your customers to the race and hope they'll give you their business. You should conduct a business meeting with the people you are entertaining either before or after the event. No, you don't have to schedule a meeting at 4 a.m. in order to conduct business the morning before the Race. The meeting can take place at an appropriate time and place, on a day close to that of the event. In other words, you should be able to show a close connection between the entertainment event and a business meeting with the people you entertain.
I meet the tests: now what?
You are limited to 50% of your cost when it comes to deducting entertainment expenses. That cost includes the cost of tickets, food and beverages at the event, and parking. The cost of transportation to and from the event is not subject to the 50% limit.
Please note that the deductible cost of event tickets is based on the face value of the tickets. Scalped tickets or tickets purchased through agencies that charge more than the face value of the tickets result in non-deductible expenses. If you pay $100 for a $50 ticket, your deduction is limited to $25, or 50% of the face value of the ticket.
If the company is purchasing the event tickets, the company will take a deduction for business entertainment on its tax return. If you, as an employee, are paying for event tickets and plan to take a business deduction, fill out Form 2106 or Form 2106EZ and include the form with your tax return. The deductible amount will carry over to your Schedule A where it will be combined with other itemized deductions.
But will the IRS believe me?
Keep track of the following information when deducting the cost of event tickets as business entertainment expense:
Cost of the tickets (or face value, if it is less that the cost)
Date of the event
Location of the event (all right . how many of you don. t know where the Indy 500 is held?)
The business benefit expected to be gained by entertaining your business associates
Who are these business associates and what is their business relationship to you?
One final note: the IRS expects you or one of your employees to attend the event along with the associates you are entertaining.