Tuesday, April 19, 2011

Deductibility of Skybox Rentals

I would like to review briefly the tax rules for deducting the expenses of renting a skybox or other private luxury box at a sporting event. Skybox rentals are subject to the general business-related entertainment expense rules as well as rules specific to skybox rentals.

In general, entertainment expenses are deductible if they are either “directly related to” or “associated with” the active conduct of your trade or business or investment activities. The direct relationship test is the harder of the two to meet. It requires an active business discussion during the entertainment event aimed at getting 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 particular facts and circumstances involved will have to be looked at, e.g., whether a business client is from out of town, the length of the business meetings, etc.

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, say 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. Then, 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 rather than under the skybox limits.

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