How to Deduct Entertainment Under the New Tax Law
An odd part of the Tax Cuts and Jobs Act of 2017 is the fact that entertainment expenses are no longer deductible. Let me explain a few things. Whether we as accountants like it or not, 80 percent of our job is sales.
Let me explain Orlando for a second. When I say Orlando, you probably think Disney and Universal, maybe even Sea World. But the tourist areas are way on the other side of town, and if you live here, you avoid that part of town like the plague.
I was born in Indianapolis and lived there until I was 2 years old. With the blizzard of 1974, my parents moved us to Orlando, where I’ve been my whole life. The biggest cities in Florida are Miami, Jacksonville and Tampa.
Orlando, until very recently, had been thought of as a secondary market. Our big claim to fame was, against all odds, landing an NBA team in 1988. About seven years ago we had a minor league soccer team called Orlando City. They dominated the minor leagues, winning a title every year. Eventually Major League Soccer (MLS) took notice, and three years ago we were awarded an MLS team, using the same name to become Orlando City Soccer Club. Season tickets are sold out, and tickets to an Orlando City game are the hottest in town. That’s not to mention that only about an hour and a half away we have the NFL team, the Tampa Bay Buccaneers.
Frankly, all of our teams suck. And all teams, except the Bucs, sell out most of their games. Our company deals with a lot of big companies, and I saw Orlando City coming a mile away. We have season tickets, four rows from the pitch. We also have Bucs season tickets.
At each game, we take a client with us, or give the tickets away, to either close a big deal or to keep a long-time client happy. We have four tickets, and my wife and I usually take the business owner and his wife to a game. People want to do business with people they have a personal relationship with. Plus, it’s a good thing for a client to see you let your hair down, have a couple of beers, and be human.
These tickets are not cheap, by the way. They cost several thousands of dollars. However, we have closed so many big deals with our clients that the cost doesn’t matter to us. However, I want the ability to deduct these expenses. They are necessary, and ordinary, not to mention they enhance our business. That sentence right there was coined by the U.S. Tax Court to determine if something is a legitimate expense or not. However, if entertainment is specifically excluded as an expense, then it doesn’t really matter when the Tax Court says you can’t deduct it. Or can you?
I’ve done a lot of thinking about this. Taking a client to a game and closing a deal can be considered entertainment. The client is supposed to be entertained by the game and the experience.
But what am I actually trying to do with these games? I am either trying to keep a long-time client happy or trying to close a deal. Usually, I can’t even tell you what the final score of the game was, or what the details were. So, wouldn’t it be more correct to say that I am advertising?
Let’s break that down for a second. During these games, I get to know the client, and the client gets to know me. My wife gets to know the client’s wife. What I am actually doing is selling myself and my practice. Eventually, I will start explaining how we do things differently, how much money we can save them, and plant seeds. Usually, the following week the client signs the engagement letter and off we go. Isn’t that actually the definition of advertising? I mean this isn’t far fetched like wrapping a vehicle in my company’s logo, using it in a TV ad, and expensing the entire car as advertising. This is old school networking. A synonym of networking is advertising. What are we doing when we are networking? We are advertising.
When I first went on my own, my wife’s idea was to join two or three chambers of commerce, where we would go to breakfasts or lunches, and network. I didn’t write that off as entertainment — it was advertising. How is this any different?
Now before you start getting cute with this, every situation is different. Don’t think everything that you used to write off as entertainment is advertising, because it’s not. However, in this case I think I have a pretty good argument.
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Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...