The IRS allows you to include certain business entertainment expenses on your tax returns each year. Expenses are treated differently depending on the type of entertainment. There are also firm guidelines you must follow for the expense to be allowable.
The expense has to be directly related to the active conduct of business either before, during or after the entertainment, or be associated with the active conduct of business. The expenses must be ordinary and necessary. This includes activities considered entertainment, recreation or amusement to clients, customers or employees. Expenses are limited to 50% of the actual expense, and are further reduced by the 2% floor.
Skyboxes and other private luxury boxes:
If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot deduct more than the price of a nonluxury box seat ticket.
To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. For example, renting a skybox for a series of playoff games is considered renting it for more than one event. All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination.
Related parties include:
- Family members (spouses, ancestors, and lineal descendants),
- Parties who have made a reciprocal arrangement involving the sharing of skyboxes
- Related corporations
- A partnership and its principal partners
- A corporation and a partnership with common ownership.
You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. The cost of regular nonluxury box seats at each event is $30 a seat. You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). Note- the 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to a charitable sports event.
Food and beverages in skybox seats:
If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. The amounts separately stated for food and beverages must be reasonable. You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals.
Make sure to keep good records of your expenses to prove your deductions to the IRS if necessary. Receipts are key. Your records should indicate: the amount paid; time, date and place of entertainment; the purpose of business discussion or the nature of business benefit that was expected; and the people who were present.