By David J. Holets, CPA, Indianapolis
September 1, 2015
Most employers take advantage of the accountable plan rules to deduct travel and entertainment expenses. Amounts received by an employee under an accountable plan are deductible by the employer without any required inclusion in the employee’s income. However, employers need to be aware of some unique rules for sporting and other live entertainment events.
Accountable Plans: General Rules
Regs. Sec. 1.62-2(c)(2) requires expenses paid through an accountable plan to meet three tests. First, any advances, allowances, or reimbursements under the plan must be paid or incurred by the employee for an expense in connection with the performance of services as an employee for his or her employer. These expenses must be otherwise allowable business expenses, and the business may be subject to further limitations on deducting them. Sporting event tickets generally are considered an entertainment expense subject to the 50% limit of Sec. 274(n).
Second, employees must provide the employer with substantiation of the expense within a reasonable amount of time. Generally, an employee should submit documents such as a copy of a receipt or similar proof of payment, indicating the date and time of the expenditure and a description of the business purpose of the expenditure.
Third, any reimbursements in excess of substantiated business expenses must be returned to the employer within a reasonable amount of time.
The definition of a reasonable period of time under both the second and third tests is based on each employer’s facts and circumstances. However, Regs. Sec. 1.62-2(g)(2) includes two safe harbors employers may rely on when establishing an employee reimbursement policy. The first safe harbor is the fixed-date method. Under this method, advances must be made within 30 days of the expense’s being paid or incurred, expenses must be substantiated within 60 days after being paid or incurred, and unsubstantiated amounts must be returned within 120 days of the expense’s being paid or incurred. The second safe harbor is the periodic-statement method. Under this method, the employer is required to provide periodic statements to its employees (no less frequently than quarterly) that detail the amount of unsubstantiated business expenses. This statement must require employees to either submit substantiation or repay the expense within 120 days.
Amounts paid to an employee under an accountable plan for tickets to a sporting event must meet several additional requirements to be deductible as a business expense to the employer. For an employer to claim a deduction for tickets purchased to a sporting event, Regs. Sec. 1.274-2(c) requires that the sporting event be directly related to the conduct of business. This generally requires that the employee actively engage in a business meeting, negotiation, discussion, or other bona fide business transaction during the entertainment event on behalf of the employer.
Although this generally is not a difficult test to meet when the employee is meeting with clients or prospects to develop new or existing relationships, IRS regulations include two additional stipulations that can result in the disallowance of this type of deduction. First, no deduction is allowed when tickets are provided to a client or prospect, and an employee or other representative of the company providing the tickets is not present. Any such tickets presented to a client or prospect would be considered a gift, deductible under Sec. 274(b)(1) only to the extent total gifts during the year do not exceed $25.
Second, substantial distractions at the event may lead the IRS to conclude that no business transactions could be conducted there. Although it might be possible to argue otherwise, general seating at a sporting event often is not conducive to conducting business transactions due to the noise of the audience and other distractions. Therefore, it is recommended that employers either use a more secluded suite without the distractions of general seating or document business transactions that occurred before or after the sporting event.
Another issue that arises often with sporting events is whether tickets purchased for family members of employees, clients, or prospects are deductible. Regs. Sec. 1.274-2(d)(2) allows a deduction for tickets purchased for spouses of individuals involved in the business transactions, but it does not mention other family members. Depending on the facts and circumstances, it might be possible to argue tickets purchased for related children are deductible as entertainment related to a business activity.
Many businesses also rent luxury suites at sporting events. Agreements for the suite often include several components such as tickets for admission, advertising expense, food and beverage costs, and fees for use of the suite. However, the rental agreement often does not break down the rental price into its component parts. Businesses should work with the venue to identify the portion of expenses related to each component.
Regs. Sec. 274(l)(2) limits the business deduction for luxury suite seats to the face value of non-luxury box seats, and the highest face value of non-luxury box seats may be used in determining this limitation (H.R. Rep’t 99-841, 99th Cong., 2d Sess., at p. II-28 (1986)). However, to determine its deduction, a taxpayer may not use the price of seats that are not offered to the public generally and that are available only to a limited group of purchasers. The amount identified for the deductible ticket price, along with any food and beverage expense, is deductible subject to the 50% limit generally applicable to meals and entertainment expenses. Any amounts identified as advertising expenses should be fully deductible as ordinary and necessary business expenses. Any remaining expense for use of the suite generally is considered a nondeductible expense for the use of an entertainment facility.
Businesses and employees regularly purchase tickets to sporting events to develop client relationships. However, the fluid nature of whether these types of events are classified as entertainment events leaves taxpayers in the precarious position of determining if the expenses for them are deductible business expenses. Employers should take care to follow the Treasury rules when claiming a deduction for purchasing tickets to sporting events.