Tax Deductions for Entertainment and Promotional Activities
By John Alan Cohan, Attorney at Law

Most firms operating in the United States paid no U.S. income tax at all in the years 1996 to 2000, according to a study by the U.S. Government Accounting Office. The GAO found that 71 percent of foreign-owned companies paid no tax on profits from their U.S. operations, while 61 percent of U.S. companies paid no tax. Of the foreign corporations that did pay tax, their tax bills were lower than those of U.S. companies.

Among the largest 1 percent of companies, those with over $250 million in assets, more U.S.-owned companies than foreign-owned paid no tax, the nonpartisan congressional watchdog agency said.

Individual taxpayers, not just corporations, have numerous opportunities to take advantage of tax laws that permit deductions for ordinary and necessary business expenses. This is true in the horse industry as well as in other industries. A taxpayer may deduct ordinary and necessary travel expenses of business trips away from home. To be deductible under section 162 of the IRS Code, travel and entertainment expenses must meet the substantiation requirements of section 274(d). That is, the taxpayer must substantiate by adequate records or by sufficient evidence corroborating his own testimony the amount of the expense, the time and place of the travel or entertainment, the business purpose of the expense or trip, and the business relationship of the person entertained to the taxpayer.

People in the horse industry will occasionally contend that they may deduct ordinary and necessary entertainment expenses associated with the promotion and sale of animals. However, the promotion of one’s animals is often best achieved by inviting people to one’s farm, providing food, drink and entertainment, and showing the horses in such a setting. The test of deductibility of advertising and promotional costs associating with sporting activities is whether the taxpayer honestly intended the activity would advertise the business in question.

Other types of advertising expenditures that the tax law permits pertain to promotion of one’s farm name or logo in connection with public events, parades, and other events or stunts. For example, people who maintain Mardi Gras parade horses often deduct maintenance costs as advertising expenses for their business name. Similarly, the owner of a pizza chain deducts the costs of auto racing in events in which the owner drives. These are deemed justifiable means of promoting one’s business or profession. Professional individuals such as doctors are known to promote their medical practice in conjunction with the promotion of animals or horse events with which they are associated. In such cases the advertising and promotional costs are charged to the taxpayer’s outside professional occupation rather than deducted as an expense of the horse activity itself, thus saving on the operational costs of the horse activity while still allowing for a tax deduction.

One caveat is that in the claiming of promotional expenses for one’s professional activity for a taxpayer’s separate horse activity, it is necessary to show that the taxpayer’s sponsorship of such activities resulted in customers or that it is otherwise helpful to the taxpayer’s professional activity. The primary purpose of the promotional activity should be to benefit one’s business. A secondary benefit is that the horse activity will be promoted and that the costs of such promotion will be allocated to the taxpayer’s separate schedule of business expenses.

Often enough, taxpayers will fail to keep adequate records to substantiate these expenses. Clearly, it is important to keep a copy of these records to show the amount, time, and place of the expense, its business purpose, and the business relation of the people entertained. The same applies to activities such as seminar or horse clinics attended by the taxpayer in an effort to enhance one’s expertise in the activity. It is important to keep and produce any records to verify that you attended the seminars, the amount of the expenses, and evidence that they were business related.

Sometimes there will be a conflict by the taxpayer in taking entertainment expenses in connection with a horse activity.

On the one hand, if you take entertainment expenses as a means of promotion of your horse activity, you will be acting according to what the tax law allows. On the other hand, if you are audited in connection with the horse activity, the IRS may take the position that the fact that you have engaged in entertainment activities is evidence of recreational features associated with the horse activity and thus points to it being a hobby (unless you are able to show two profit years in a seven-year period).

In the absence of adequate records on entertainment expenses, or if a taxpayer fails to show linkage between promotional expenses of horses and a business advantage to one’s professional activity, tax law allows the taxpayer to provide verbal statements as evidence. However, testimony alone is usually not sufficient to permit a deduction under these circumstances.

[John Alan Cohan is a lawyer who has served the horse industry since l98l. He serves clients in all 50 states, and can be reached at: (3l0) 278-0203 or by e-mail at JohnAlanCohan@aol.com.]

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