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Entertaining Entertaining?
Think about entertaining well and getting a deduction
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Business New Haven
10/6/1997
By: Angelina Anderman
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It works like magic. You can nearly always get the attention of your target client by inviting them to something. They won't necessarily accept, but they will always listen to your invitation and might even remember you with some degree of approval at a later date.
The possibilities are almost endless. There are big deals, there are very big deals, and there are super big deals - how much can you afford to spend on making friends and influencing people?
In 1997, as in previous years, entertaining centered on sporting events. So how about inviting the best customers to the Masters golf tournament in Augusta, Ga., to the Kentucky Derby or perhaps a little trip to Pebble Beach? All of these involve plane fares or private jets, luxury hotels, meals and other expenses.
A little more esoteric, but still way up on the expense list, comes a box at the U.S. Open tennis tournament, a sailing weekend in Newport aboard a lavishly catered 12-meter yacht, salmon fishing in Nova Scotia, a shooting party in Denmark or learning to auto race at Sebring.
Okay, enough ideas for the boss. What about the sales vice president or like title? He has some type of budget, but often not enough to try the following. However, with some creativity, it can work.
More sports, of course: The Pilot Pen International tennis tournament with admission to the food tent; this year a box, which is usually four seats with your company's name hanging on a little sign, was around $10,000. A seasonal skybox at the Civic Center/Whalers before becoming a defunct possibility cost more than $20,000, plus stocking up the bar. A tent at the Canon Greater Hartford Open golf tournament could cost more than $25,000 depending on how lavish the catering and how open the bar. However, all these provide entertainment for multiple customers or clients, thus justifiable as a “good deal.”
A down side is that such public events are also attractive to your own personnel, and it's hard to tell them they aren't welcome in the company tent or can only use sports tickets if no customers are booked.
If your budget doesn't run to Indianapolis or Sebring, try Lime Rock. No Derby money? Try the Trotters at Yonkers Raceway or beautiful Saratoga Springs. Salmon too exotic? Try a day out for bluefish on the Sound.
What all these ideas have in common, in varying degrees, is that they all cost plenty of money. They are entertaining on the big scale. What's more, they don't invite much sympathy in the tax deduction area.
The IRS rules on such entertaining are both specific and open to interpretation. Often categorized as “goodwill entertainment” because it is used to gain goodwill with customers, potential customers or business associates, these costs are not deductible unless a substantial business discussion took place, with the topic documented.
“Entertainment carried on in a setting such as a sporting event will generally not qualify as being directly associated with a business discussion,” advises Tom Ferreira, a partner at the New Haven accounting firm of McGladrey & Pullen. “The law presumes that a business discussion cannot be carried on at such a time due to the distractions present.”
For allowable deductions of entertainment expenses, you must be able to prove that it is directly related to your business by satisfying either of two tests. First, the entertainment must occur during an active business discussion. To satisfy this test you must meet four requirements (1) you must expect to derive a business benefit other than goodwill; (2) while entertaining, there must be a business meeting or bona fide business transaction; (3) the principal character of the meeting must be business; and (4) expenses of a non-business guest are not deductible.
The second test is whether the entertainment occurs in a clear business setting. To comply with IRS rules, you must also have five elements carefully recorded: date, place, amount, client and business purpose.
Moving away from sports, there are other entertainment possibilities for the discerning few. An evening at the Metropolitan Opera or a Broadway show, complete with limousine and dinner in New York can be a powerful entertainment tool, especially popular if spouses are to be included. If the reward is for a deal already settled, then the guests can go at their convenience and the donor does not have to be present - but don't expect any tax allowance. Other remote entertaining could be cases of wine or attractive food baskets delivered to the recipients home which, over the years, have proved popular and discreet.
Does all this make business entertaining sound onerous? The possibilities have not been exhausted yet. Season tickets with and without company sponsorships to the Oakdale, the Shubert, Long Wharf, the Bushnell, Yale Rep., Hartford Stage, New Haven Symphony and Goodspeed Opera House allow an executive to entertain multiple guest couples during a season. If there is a direct business purpose, in many cases the tickets may be deductible and so may a portion of the preceding or following dinner.
Finally, we come to the means of entertainment most available to the normal mortal, taking a customer to lunch, maybe to dinner, sometimes a company reception and possibly an invitation to participate in a charity golf tournament or tennis match. It is hard to forget sports entirely. The New Haven environs have a wealth of good places to eat, drink, see and be seen. Just remember to have a business discussion at some stage, document the five elements, and you might just qualify for a 50-percent tax deduction.
Getting the last word, Ferreira says: “While the rules are complex, compliance carries with it the rewards of tax deductibility and thus, reduced net cost of the entertainment expense. Failure to comply, however, can be extremely costly.” Go forth and entertain - you have been warned.
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