Entertainment Expenses Tax Research Memorandum Jennifer Woods

Entertainment Expenses

Tax Research Memorandum

Jennifer Woods

From: Tax Accountant, CPA

Entertainment Expenses

Facts

You are employed by Ski USA, a distributor of ski equipment and boots. You have been a bicycle racer for two years, in which you have participated in about 50 races annually, winning some so there is revenue, and incurring expenses, some being paid by sponsors. The National Bike Racing Association has ranked you in two events, the dual slalom and downhill races.

The issues are 1) whether the racing expenses can be a deduction for adjusted gross income against the winnings from the races from races and the sponsorship money received and, if so, 2) how much can be deducted for AGI against the racing winnings.

Rule

As explained in IRS Publication 463, Revenue Rule 2003-106 says that ordinary and necessary expenses to entertain a client, customer, or employee can be deducted if expenses meet the directly related test or the associated test.

Analysis

The ruling that was found was the Revenue Rule, which pertains to business entertainment and travel expenses. The rule declares that ordinary and necessary entertainment expenses can be deducted if they are to entertain a client, customer, or employee if the expenses meet the directly related test or the associated test. Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. An ordinary expense is one that is common and accepted in your trade or business. The directly related test is the entertainment took place in a clear business setting, or main purpose of entertaining was the active conduct of business, and you did engage in business with the person during the entertainment period, and you had more than a general expectation of getting income or some other specific business benefit. The associated test is the entertainment is associated with your trade or business, and is directly before or after substantial business discussion. If deductible, IRS Revenue Code, Section 274 places a 50% limit on the unreimbursed expenses.