IRS plays hardball if you try to score
deductions for stadium luxury boxes
By Cora M. Barnhart • Bankrate.com

As football season approaches, a number of enterprising fans have one thing on their minds -- when can they deduct that skybox seat and canape tray? Business owners should double-check the rules for deducting expenses when they take a client to the big ballgame.

The IRS plays hardball when it comes to deducting expenses for sporting events, paying special attention to claims for travel and entertainment expenses.

This tax tip shows business owners how to make the cost of taking clients to a football game as deductible as possible. It discusses the two sets of tests the IRS uses for allowing deductions for entertainment expenses. It also explains what the IRS means by a reasonable cost in this situation and how it will apply its 50 percent limit. It also considers additional tax consequences of snacks and spouses in the skybox.

To qualify as a deductible entertainment expense, expenses for the football game have to pass two sets of tests.

Test One: Was it ordinary and necessary?
First, expenses must be ordinary and necessary business expenses. The IRS examines expenses common to your competitors when determining whether a particular expense is deductible. An ordinary expense is one that is common and accepted in a business. A necessary expense is one that is helpful and appropriate to a business.

Test Two: Can you relate the event directly to your business?
Once it's clear the expenses won't stand out from those of other businesses in the same industry, the host needs to pass a three-part test:

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• First, he must show that he combined business with entertainment with one primary purpose in mind, to conduct business.
• He also has to demonstrate that he actually engaged in business with his guests during the big game.
• Finally, he must show that he had a good reason to anticipate a very specific business benefit at some future time.

The 50 percent rule
After an expense passes the two sets of tests described above, the IRS has a few more hoops for business owners to jump through before they can deduct those sporting-event expenses. Expenses for the game can't be "lavish or extravagant." What may frustrate football fans about this is that the IRS doesn't use specific dollar figures when making this determination. They base the decision on facts and circumstances.

When determining what is a reasonable cost for an event such as attending a football game, the IRS starts off with the face value on a ticket. Fees paid to a ticket agent are not deductible. Keep this in mind before you start wheeling and dealing with the scalper out front.

The IRS also limits what is reasonable for the cost of skyboxes and other private luxury boxes at a sports arena.

There may be occasions where you are shelling out cash for more than one event, such as a playoff series. Keep in mind that the face value of nonluxury tickets will affect how much of this expense is reasonable, limiting the amount you will ultimately be able to deduct.

A reasonable cost for tickets to a World Series game between the New York Yankees and the New York Mets, for example, can't exceed the face value of nonluxury box seats times the number of seats in the box and the number of days of the event.

If box seats for games at both Subway Series location go for $150 and the series goes the full seven games, a Yankee fanatic who takes herself and a client to all four games at Shea Stadium will have a reasonable cost of $1,200.

But while she's chowing down on a hot dog, the host should also be prepared to eat half of the cost of the event. Only half of the reasonable cost is deductible. This 50 percent limit includes taxes and tips arising during the outing, as well as parking fees at a sports arena.

If the host rents a room for a pre-game cocktail party or dinner, the charges are also subject to the 50 percent limit.

A simple example
A football example will clarify this rule.

Suppose you pay $3,000 to rent a 10-seat skybox overlooking the gridiron at Hometown University Stadium for three ballgames to entertain a group of business clients. You discuss business. You sing the fight song and bond. You expect it will lead to a big contract eventually. You also expect Uncle Sam pick up the tab.

Fumble! You can't deduct the entire $3,000. It is subject to the 50 percent rule. In fact, you can't even deduct 50 percent of the $3,000 cost. You have to begin with a reasonable cost.

Where do you start? You need to find out the cost of regular nonluxury seats. In this case, Hometown U. sells them for $20 a ticket.

To get to the reasonable cost, multiply the $20 price by the number of seats and the number of games. This will be $20 times 10 seats times three games, which means you have a reasonable cost of $600. Now, take 50 percent of this amount to determine what you can deduct.

The deductible portion of the $3,000 skybox will be $300.

Snacks and spouses
Going through the calculation process above emphasizes just how limited the deductions for skybox rentals can be. A tax-savvy football fan might be tempted to recoup his expenses by inflating other related charges. Be forewarned that the IRS doesn't consider this an acceptable strategy.

For instance, the expenses for food and beverages may be separately stated from those for the skybox. If this is the case, you can deduct these expenses in addition to the amounts allowable for the skybox. However, the amounts must be reasonable. In other words, don't count on inflating the food and beverage charges and getting away with it.

Bringing along spouses or friends on business outings brings up another relevant issue. If a host takes her spouse to the football game, or if a client's spouse tags along, are the spouses' expenses deductible? The general answer is no. However, there are exceptions to this, particularly where spouses are involved in partnerships. If the host can show that the spouse is also there for business purposes, the spouse's costs are deductible.

Let's go back to the skybox example above. You will be able to deduct $300 if all 10 of the fans are there for business purposes. But if three of the 10 football fans were spouses who weren't there for business purposes, you will have to reduce this amount by 30 percent. In this case, the host will only be able to deduct 70 percent of the $300 amount, or $210.

So, what's the bottom line here? You can deduct expenses for entertaining clients, but you have to keep in mind that the IRS is strict about what it considers a reasonable cost. As the price difference between luxury seating and nonluxury seating increases, so will your share of the tab for entertaining.

-- Updated: Aug. 8, 2001