BY JOE KRISTAN, CPA, Partner, Eide Bailly
It’s the fourth quarter. Your team is down five touchdowns on the way to their fourth straight loss. It’s 35 degrees and raining. You aren’t having any fun.
But…but you are being entertained.
That’s what the tax law says, anyway. And if you are being entertained, forget the tax deduction.
Tax law has come a long way from the days of the deductible three-martini lunch. The changes started with special requirements that taxpayers must be able to back up their entertainment expenses with receipts or other contemporaneous evidence. Taxpayers were also required to document the business purpose of their entertainment and the participants, as well as the time, place and amount of the deduction. These substantiation requirements also applied (and still do) to travel and meal expenses.
Entertainment got 20% less entertaining, tax-wise, in 1986. The 1986 tax reforms made most business expenses for entertainment and meals only 80% deductible. Those deductions were further chipped back to 50% in 1993 and remained so for another 24 years.
While business meals remain 50% deductible, the tax party ended for business entertainment expenses altogether with the tax reform changes enacted in 2017. That means we now need to know what the IRS finds entertaining.
An IRS publication gives us a hint:
Generally, you can’t deduct any expense for an entertainment event. This includes expenses for entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips.
Nothing in the tax law says the team—or the nightclub, or the hunting, fishing or show—has to be any good to qualify as “entertainment.”
Generally, you can’t deduct any expense for the use of an entertainment facility. This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection.
An entertainment facility is any property you own, rent, or use for entertainment. Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort.
If it’s any consolation, the yacht deduction hasn’t historically been popular in central Iowa.
Not done yet. Sometimes it’s not entirely clear whether an expense qualifies as meals or as entertainment.
What if you go to a baseball game in a skybox, but everyone heads for the wonderful food and ignores the game? Is the food provided part of the non-deductible entertainment, or a deductible expense for whoever provided it?
It depends on how the ballclub breaks out the invoice. If the food is listed and priced separately from the skybox rental and tickets, then the 50% deduction may be available—but only if the taxpayer can also document the people involved and the business purpose of the event, because as mentioned before, those documentation rules are still in place.
So, remember: after 2017, business entertainment is no longer deductible. Business travel is fully deductible. And business meals are half-deductible. But, a deduction only comes to those of you who keep your receipts and document the time, amount, people involved and business purpose of each event on a timely basis.
Best of all, no matter how amusing your accountant may be when helping you get the documentation for your expenses in order to reduce your tax bill, the IRS will never count that as entertainment.
| Joe Kristan