Snidely Whiplash, a personal injury lawyer, was trying to get business from his friend “Attila” who is a chiropractor. Attila’s common law wife Hun loves mud-wrestling matches. “If I could arrange something to please Hun,” thinks Snidely, “surely Attila will send me some business!”
Snidely learns that the world mud wrestling playoffs are coming to town. Sadly, the tickets are sold out! Using his connections, Snidely contacts a ticket-scalper and finds he can acquire ring-side seats for $500 apiece (the face price is $200 apiece). Since Hun will be attending, Snidely figures that his wife will probably be suspicious if she is not invited to come too. So Snidely peels off $2000 and buys four tickets. Belatedly, Snidely calls his tax lawyer: “Surely this is all tax-deductible? Right?”
Sadly, Snidely, the answer is “No”.
Tilting the Scales with our LRM Tax Lawyer Tom Rhodus.
Deductibility: Under the best of circumstances, business entertainment expenses are only 50 percent deductible. Buying four tickets (to take along spouses) is probably just fine, because it would be a bad idea for Snidely not to include his wife. Attila is the one who has the business, even though Hun is the one being entertained. In addition, only the face amount of the tickets is deductible; the excess charged by the scalper is not.
Business Discussion: There must also be a business discussion in order to declare a deduction for the tickets. A sporting event is not considered a place where a serious business conversation can take place. So to be deductible, Snidely needs to take Attila and Hun to dinner before (or perhaps for drinks after) the mud-wrestling match, so that he can explain to Attila why he needs to hire him.
Records: To avoid making the news, hang on to the receipts in case you are audited by the IRS. The IRS agent, and maybe more, will definitely want to see them. In addition, include the date and time of the event as well as who attended and what was discussed. In the case of Snidely, maybe he can write a check to the scalper (or get a receipt) for the tickets to document the cost of the tickets. As for the drinks and dinner, that’s easy – put it on a credit card and Snidely will automatically have a record of the time and location. However, he will need to record Attila and Hun’s names (and his wife’s as well) on the receipt, note the nature of his relationship with Attila and Hun (“prospective clients”) and the nature of the business that was discussed (“cases I have won for people like Attila”).
Thanks to Tom Rhodus in the Dallas office of Looper Reed & McGraw for providing this fun insight into one of those thorny tax issues that seems to be grabbing the headlines lately.
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