BGBC Partners, LLP Tax Update: Deducting Skybox and Event Suites
As a business owner, you are well aware that your business relationships matter! Whether it is a key customer, vendor or fellow business owner, your ability to foster and nurture your business relationships can mean the difference between the success or failure of your business.
One great venue to host a key contact, or for a networking group, several contacts, is a skybox. These are private suites set aside by sporting and event venues for a premium price. However, it is a great atmosphere for fostering casual conversation. In this Tax Update, we will focus on whether Uncle Sam allows you to deduct any or a portion of the Skybox rental cost.
Skybox rentals are subject to the general business-related entertainment expense rules, as well as their own specific rules. The tax law states that entertainment expenses are deductible if they are either “directly related to” or “associated with” the active conduct of your trade or business. The direct relationship test is the harder of the two to meet. It requires an active business discussion during the entertainment event aimed at producing immediate revenue (as opposed to generalized good relations).
Accordingly, the “associated with” test is more likely to apply in the case of a skybox rental. To qualify under this test, you only need to have engaged in a substantial and bona fide business discussion before or after the entertainment event. If the discussion and entertainment event occur on the same day, the test is passed. If they are on different days, it may be more difficult to link the two, and the facts and circumstances involved must be examined for such factors as whether a business contact is from out of town, the length of the business meetings and other circumstances which point to a business purpose.
In general, qualifying entertainment expenses are only 50% deductible. That is, if you spend $300 to entertain a client, the deduction is limited to 50% of your cost, or $150.
Special rules also apply for meals: they aren't deductible to the extent their cost is “lavish or extravagant” under the circumstances, and either you (or an employee of yours) must be present at the meal for the expense to qualify.
In addition, another limitation applies to the rental of a skybox or other private luxury box if the box is leased for more than one event. In that case, the deduction can only be based on the value of nonluxury box seats for the same event. For example, you rent a 10-seat skybox at a stadium for $3,000 for three ballgames, where a nonluxury box seat costs $20. Ten seats times $20 for three events totals $600. Applying the general 50% limitation, the deduction would be $300, if the skybox was used for each event for entertainment “directly related to” or “associated with” the active conduct of your trade or business.
In determining whether the skybox rental is for more than one event, each game or other performance is counted as one event. Thus, a single lease for three or four World Series games is a lease for more than one event. On the other hand, two or more separate leases for the same event would be treated as one. That is, if three skyboxes are rented for a single game, the three leases would be treated as one, so the lease wouldn't be for more than one event. Additionally, if separate charges are incurred for food and beverages consumed in the skybox, these are deductible separately under the regular rules for such expenses (i.e., only 50% deductible) rather than under the skybox limits.
As you can see, these rules are tricky so it is best to check with your CPA to evaluate whether it’s worth it to rent a skybox. If it makes sense, you may get the triple benefits of some great entertainment, a stronger business network and a partial tax deduction!
