Let Us Entertain You (or Not)

The Tax Cuts and Jobs Act (TCJA) or, as I like to call it, the 2017 tax reform law, changed quite a few things for taxes. Most of these lower rates, or add a new deduction or credit. However, there were changes the other way, too. One of these involves “Entertainment” expenses.

If you’re in business you’re allowed to deduct all “necessary and ordinary” business expenses. Of course, there are some exceptions. Meals and Entertainment expenses have been limited to 50% of the amount spent. There are substantiation rules, too. The TCJA removed the ability to deduct entertainment expenses.

So let’s say you had season tickets to the Vegas Golden Knights, and you took a client (a different one) to each of the 41 home games. You discussed business, either during the game (there are stops and intermissions in hockey) or immediately before or after. You noted who you spoke to and the business purpose (and topics) in a log. In 2017, that expense would be deductible. Today that expense is not deductible.

A client called me up and asked me how he could get around the rules. (Lovely, I thought: Ask your tax professional how to commit tax evasion.) What if we call it advertising? I noted that if you were advertising in, say, the Knights’ program that would indeed be advertising. But it was hard for me to see how watching a hockey game is advertising. Well, he said, if there was a seat license fee (something that’s common for football) could we call it a “licensing” expense? No, you’re not paying to have your business licensed. It’s entertainment. I did tell him that if he took a client to the game and purchased food, and discussed business then the food expense would likely qualify as a meal deduction (assuming proper documentation, of course).

The problem is the Duck Test. “If it looks like a duck, walks like a duck and quacks like a duck, then it just may be a duck.” Tickets for athletic events, concerts, etc. are for entertainment. You can slap another label on it (“office expense” is one I expect to see next year) but it will still be an entertainment expense. And those are decidedly no longer deductible. The Tax Code giveth, and the Tax Code taketh away.

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