This weekend, I’m getting back to my roots. I dug out my car, and we’re heading to San Jose for a hockey fix, featuring the Sharks (hopefully) beating up on the Maple Leafs. That got me to thinking about one of my favorite business-owner questions, “How can I write this off?”
I came to the conclusion that in this instance, I can’t. But with it fresh in my mind, I thought I’d share quickly what the rules are for writing off entertainment expenses. Note that this discussion doesn’t include hunting or fishing trips, or yachting trips. Those are covered under separate rules. What I’m talking about here are sporting events, meals, tickets out to a show, nightclub, etc. Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families.
To deduct entertainment expenses, you’ve got to first meet the “ordinary and necessary” deduction test, and then meet either the “directly-related” test or the “associated” test. For the directly-related test you’ve got to show that business was the main purpose of the entertainment, that you actually did business, and that you had a general expectation of getting some kind of benefit out of the deal. To meet the associated test, you need to show that you had a clear business purpose for having the expense, including an expectation of getting new business or to encourage the continuation of an existing business relationship.
Most sporting events, plays, cocktail parties, nightclubs, etc., are considered to be too distracting to qualify as directly-related, which means they fall into the associated category. You don’t have to have a meeting of any specific lengthy, but you do need to show that it happened. This is where keeping a little notebook recording the meeting, what you discussed and (hopefully) the business or income you eventually wound up with. It’s also a great idea to combine a business meeting over dinner before or after the entertainment. (Let’s face it, it’s much easier to show that you did business over a meeting than when you’re on your feet screaming during overtime). Finally, you don’t have to show that you actually got the business or income — just that you tried.
In general, you can deduct only 50% of your business-related meal and entertainment expenses. The 50% limit applies to yourself and your employees, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. Expenses subject to the 50% limit include taxes and tips, nightclub cover charges and parking fees at sports arenas (Your transportation costs to and from the entertainment event are fully deductible btw). Also, where event tickets are concerned, that 50% applies to the face value, regardless of whether or not you actually paid more.
One neat exception to this is charity events. If you take someone to an event benefiting a charity, put on by volunteers, and where all of the net proceeds go to the charity, the 50% rule doesn’t apply. And if you buy your ticket as part of a package, all of your costs are 100% deductible. But be careful with this one. While you can write off the entire cost of a golf tournament organized by a local volunteer fire company to raise money for new equipment, you can’t write off all the costs to a college football game. That’s because colleges pay for coaching and player recruiting services.