Friday, November 20, 2015

Deducting sports tickets as a business expense? Know the rules

If running a business while also rooting for your favorite sports team isn’t stressful enough, business owners who assume they can write off the cost without checking the rules could be setting themselves up for some extra heartbreak.

No matter the season, it’s still common practice for business owners to mix business and entertainment at a sporting event. Business owners have learned over time they can sometimes close a deal or win over a prospect more readily when the conversation is moved to an atmosphere that’s a little more relaxed than a corporate boardroom.

The Internal Revenue Service has clamped down, however, on taxpayers who deduct the costs of such entertainment as a business expense. It’s not as simple as buying the tickets and showing the receipt to claim a deduction. The IRS has established some criteria for when it believes tickets to a sporting event might logically constitute a legitimate business expense.

First, the IRS says the sporting event must be tied directly to the conduct of business. That means the company claiming the deduction must show that some sort of business took place at the sporting event.

The IRS goes a little further, though, to provide some additional criteria. One important one: The IRS finds it hard to believe any business activity could have occurred if the company simply gave the tickets away to a client or prospect.

That means someone representing the business must actually be present at the event in order for the deduction to be allowed as a business expense. Otherwise it is treated as a gift, where the tax rules are different.

Also important: The IRS finds it difficult to imagine business would actually be conducted at the sporting event itself, given the many distractions. It seems examiners have a hard time believing anyone would focus on the particulars of a business deal with superstars like LeBron James sinking three-pointers amid throngs of screaming fans and other blaring distractions.

This suggests any attendance at a sporting event must be accompanied by some other stop along the way to an atmosphere a little more conducive to business. That could mean a stop at the office on the way to or from the event, or even a nearby restaurant or sports bar.

The IRS also has some limited language around when tickets are deductible if they are used by family members. The rules allow a deduction for tickets used by spouses of individuals involved in the business transaction, but it does not specify any other family members. Some might argue that tickets used by related children might also be deductible, but that might depend on the facts and circumstances of the specific event.

If the tickets are to a suite, that adds another layer of analysis to the deductibility of expenses. IRS rules limit the deduction to the face value of non-luxury box seats, and it allows for the highest-value non-luxury seat price to be used as long as those seats are available for the general public to purchase them.

Suite pricing typically includes some combination of tickets for admission, food and beverage service, advertising costs, and fees to use the suite.

The venue may need to provide some itemization for the taxpayer to sort out what portion of the suite cost goes to food and beverage expense that is deductible. However, that deduction is limited to 50% of the cost when the tickets are used and the event is properly documented.

Even in the uncertain sports environment from season to season, doing business at a game is still common practice.

Winning the tax deduction is a better bet for business owners who know the rules ahead of time.