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Maximize Your Deductible
Entertainment Expenses
New Limits: New Limits:
Starting in 1994, tax law limits most of your entertainment expenses
to 50%.1
Stiffer rules on the way: Stiffer rules on the
way: The new law also requires IRS to stiffen the documentation requirements
for deductible entertainment expenses.2
Receipt Rule: Receipt Rule: No receipts are required
for entertainment expenses under $75 per expense.2A
Strategy 1: Discuss business when you eat.
BRIGHT IDEA
New discussion rule: New discussion rule: The
law contains a new requirement. You must discuss business before, during,
or after a business meal to qualify for a business meal deduction.3
WARNING!
Purpose: Purpose: Tax law requires that a business
meal be arranged for the purpose of conducting specific business.4
Setting: Setting: The business meal must take
place in surroundings conducive to a business discussion.5 IRS presumes that the "active business discussion" test is
not met if the business meal occurs under circumstances where there
is little or no possibility of engaging in business.6 Eating
dinner at a nightclub with a continuous floorshow is an example of a
non-business setting.7 Similarly, a large cocktail party
is not a business setting.8
Documentation: Documentation: Answering the questions "who," "where," and "why" and recording
the cost.
Strategy 2: Deduct theater tickets and other "associated
entertainment" expenses.
BRIGHT IDEA
Not a business setting: Not a business setting:
The theater is not a place conducive to a business discussion.9
According to tax law, you may not discuss business at the theater.10
Deduction rule: Deduction rule: The cost of theater
tickets is deducted under the "associated" entertainment rule.11
Associated entertainment, also called goodwill entertainment, takes
place in a non-business setting.12 No business discussion
occurs during the entertainment. The entertainment precedes or follows
a substantial and bona fide business discussion, usually the same day
as the entertainment.13
HOT TIP
Key – Record the link: Key – Record
the link: There must be a link between the business discussion and the
entertainment.14 It is important that the business discussion
occurred in a proper business setting and was followed by entertainment "associated" with the dinner discussion.
Non-business settings: Non-business settings:
Associated entertainment that can be linked to business meals and other
direct business discussions includes entertainment at:
- Nightclubs
- Golf courses
- Theaters
- Sporting events
- Hunting trips
- Fishing trips
- Ski trips
Note: 100% Deduction for Certain Businesses:
Note: 100% Deduction for Certain Businesses: IRS uses an
objective test to determine whether an activity is of a type to constitute
entertainment (which is 50% deductible) or more like business promotion
(which is 100% deductible). Thus, attending a movie or theatrical performance
would normally be considered entertainment. However, it would be 100%
deductible and not deemed entertainment, if done so by professional
theater critics or movie critics.14A Similarly, a golf club
salesman who plays golf and demonstrates his clubs and other golfing
equipment should be able to deduct 100% of his green fees and costs
of his golf balls, caddie expense, etc.
Strategy 3: Deduct season tickets by event.
BRIGHT IDEA
Season tickets and box seats to theaters and sports
events are treated according to the individual events.15
If, for example, you hold season theater tickets to attend 15 specific
performances during the year, you treat each of the 15 performances
separately.16
Strategy 4: Use entertainment tickets as business
gifts to avoid $25 ceiling.
WARNING!
Property gift rule: Property gift rule: Tax law
limits your maximum deduction to $25 for business gifts to any one person
during a tax year.17 This limitation applies to gifts of
tangible personal property.18 Husband and wife are treated
as one taxpayer for purposes of the $25 limit.19 Gifts made,
however, to business where there is no single person designated to receive
or benefit from the gift, has no limit.19A
Entertainment gift rule: Tax law has an alternate
rule for gifts of entertainment tickets. You have the choice of treating
the gift of a theater ticket either as entertainment or as a business
gift.20 There’s no $25 limit on the entertainment gift.
Moreover, when giving tickets as gifts, you need not go along to the
entertainment event.21
Meals are not entertainment. Meals are not entertainment.
Gifts of entertainment meals are no longer allowed.22 You
are entitled to a tax deduction for a business meal only if you are
present during the consumption process.23
Strategy 5: Feed and entertain your spouse.
IRS has a "closely connected" rule. Most spouses
are closely connected. The closely connected rule permits deducting
the expenses of entertaining your spouse as well as the spouse of a
business guest.24 In other words, if your business guest
brings a spouse, you are entitled to bring yours.25 Naturally,
you must be entertaining the business guest during the ordinary and
necessary course of your business and you must meet the business discussion
and documentation requirements.
Strategy 6: Deduct Dutch-treat meals.
BRIGHT IDEA
When you go to a meal with a business guest, pay your
own way and spend more than what you would normally spend.26
The Dutch treat rule comes into play. If, for example, you attend a
Chamber of Commerce luncheon meeting and the lunch costs more than you
would normally spend for lunch, you may claim the excess as a Dutch-treat
business lunch.
Example: Example: You spend $22 at a Chamber
luncheon. Had you not gone to the luncheon, you would have spent $2.
Your deduction is $10, the excess business cost over your personal cost
(times 50%).
Strategy 7: Document personal meal costs to support
your Dutch-treat meals and avoid the "Sutter Rule."
HOT TIP
Written evidence: Written evidence: Your personal
meal evidence must be in writing. Entries in your diary or account book
are strong evidence.27
HOT TIP
30-Day test: 30-Day test: Record the cost of
personal lunches in your diary. Do this for at least 30 personal lunch
days during the year.
Meals at home: Meals at home: When you eat meals
at home, the task of developing your personal meal costs is somewhat
more complicated. There are basically two ways to compute the cost of
personal meals consumed at home.
Method 1: Write down the actual items consumed
and determine the cost of each item. Two eggs for breakfast, when a
dozen eggs cost $1.20, would cost $0.20. If you need to determine actual
costs only a few times during the year, it’s easy to simply write
down the actual items consumed. Write down the actual items consumed
and determine the cost of each item. Two eggs for breakfast, when a
dozen eggs cost $1.20, would cost $0.20. If you need to determine actual
costs only a few times during the year, it’s easy to simply write
down the actual items consumed.
Method 2: Method 2: Use actual grocery bills
to make an allocation by members of the family. If, for example, the
grocery bill for a week amounts to $150, you can estimate the cost for
breakfast, lunch, and dinner. If the dinner groceries cost $70, you
could divide the $70 by seven days in a week to arrive at $10 for the
average dinner. If there are two people in your family, the average
cost per person is $5. That would be your cost for purposes of determining
your Dutch treat deductions and maximum disallowance under the Sutter
Rule.
1. IRC §274(n).
2. H. Rept. 99-841, p. II-27.
2A. Section 1.274-5(c) of the Regulations; IR 95-56;
Notice 95-50, 1995-42 IRB.
3. P.L. 99-514, § 142(a)(2)(A) Amending IRC § 274(e).
4. IRC § 274(a).
5. Reg. § 1.274-2(f)(2)(I)(a).
6. Reg. § 1.274-2(c)(7).
7. Reg. § 1.274-2(c)(7)(ii)(a).
8. Ibid.
9. Ibid.
10. Ibid.
11. Reg. § 1.274-2(d).
12. Reg. § 1.274-2(d)(1).
13. Reg. § 1.274-2(d)(1)(ii).
14. Reg. § 1.274-2(d)(3)(I)(a).
14A. 1.274-2(b)(I)(ii).
15. Rev. Rul. 63-144, 1963-2 C.B. 129, Q & A 50.
16. Ibid.
17. IRC § 274(b)(1).
18. IRC § 274(j)(3)(A).
19. IRC § 274(b)(2)(B).
19A. § 1.274-3(e)(2).
20. Reg. § 1.274-2(b)(1)(I); Reg. § 1.274-2(b)(1)(iii)(b).
21. Reg. § 1.274-2(b)(1)(iii)(b)(2).
22. IRC § 274(k)(2).
23. IRC § 274(k)(1)(B).
24. Reg. § 1.274-2(d)(4)
25. Ibid.
26. E.g., Sutter v. Commissioner, 21 T.C. 170
(1953), acq. 1954-1 C.B. 6.
27. Reg. § 1.274-5(c)(2).
@ 1998 All Rights Reserved Sanford Botkin
Notice: Concerning
the above tax comments, keep the following in mind:
- This is how
the above tax strategy works generally.
- This assumes
that you are running a business with an honest "expectation of profit"
and "that your expenses are ordinary, necessary, reasonable and directly
related to your business."
- You document
the deductions correctly.
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