Ever since I was a little kid, I’ve loved watching NFL Football. Before we in North Carolina had a home team of our own, I was always a ‘Niners fan. But for the past decade or so, I’ve become what you might reasonably call a rabid Carolina Panthers devotee. So it was with great excitement that I took some friends to last Sunday’s home opener game. One of those friends is a possible future business partner. What prompted me to write this post is to share the rules about the deductibility of entertainment expenses, and especially as they pertain to sporting event tickets.
What Makes Entertainment Expenses Tax-Deductible?
As a general rule, you can deduct 50% of the ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test.
Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client.
An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate; it must pass “the laugh test.”
In order to be tax deductible, the entertainment expenses must meet one of these two tests.
To pass the “directly-related” test, you must demonstrate that:
- The entertainment activity took place in a clear business setting, or
- The main purpose of the entertainment was the active conduct of business, and
- You did actually engage in business during the entertainment period, and
- You had more than a general expectation of receiving income or some other specific business benefit.
Note that it isn’t necessary to devote more time to business than to eating or entertainment, nor that business income or a business benefit actually occurred. Just a general expectation will suffice.
Even if the expenses don’t mean the “directly-related” test, they may meet the “associated” test if:
- The entertainment is associated with your trade or business (which basically means that you can show a clear business purpose for having the expense, such as getting new business or encouraging the continuation of an existing business relationship), and
- The entertainment directly precedes or follows a substantial business discussion.
Are NFL Tickets a Legitimate Entertainment Expense? Generally, Yes
Clearly, entertaining my friends (and potential business associate) at a Panthers football game doesn’t pass the “directly-related” test. No matter how you slice it, the main purpose of the activity was most definitely to watch football, not conduct business.
But what about the “associated” test? What exactly is a “substantial business discussion”? Does the fact that my friend and I said, “Heck yeah! I can’t wait to work together on this project, woot!” constitute substantial?
Considering that: a) substantial means “of considerable importance, size, or worth,” and b) this project my friend and I are developing could be of considerable importance to my business, then I’d say … yes. “Substantial” is one of those sufficiently vague IRS weak words that allows for a lot of leeway.
But what if it doesn’t pan out? What if my friend ends up not wanting to quit her corporate job and join my little empire? I still say that, yes, the cost of the tickets are tax-deductible, because my intent at the time of the ticket purchase was to engage in a business project with my friend. As mentioned above, it doesn’t matter whether a business benefit actually occurs.
BUT! As always….
Keep Good Records!
Of course it absolutely goes without saying that you must carefully document all entertainment expenses, just as you would all other business expenses (like travel and advertising). ALWAYS remember to write down the “5 W’s” on your receipts …. who, what, when, where & why. Then snap a photo of ’em with the Xero Mobile App and upload them directly to the associated transactions in your Xero account.