The recent tax legislation passed by congress has eliminated the 50% deduction for business related entertainment and has put the deduction for business related meals in question.  While some clarification is expected by summer, the consensus is that meals that are not strictly for entertainment purposes will be allowed, if some tangible business purpose is established, but that meals for strictly entertainment purposes will not be deductible.  What is clear is that tickets and suites at sports events are no longer deductible.  Access to other events such as concerts, festivals, or Broadway will also be disallowed as a deduction.  Golf outings, fishing trips and sunset cruises are also affected.

Spago in the Four Seasons, Maui

Spago in the Four Seasons, Maui, by Neeta Lind

College sports seems to have been particularly singled out by this anti-entertainment legislation.  No longer will donations with ties to ticket or suite access be allowed as a charitable contribution.

The effect on professional and intercollegiate sports, stadiums and arenas is sure to be felt, as will restaurants, caterers and catering facilities.  Businesses such as golf courses, fishing charters and the like could also be affected.   There is no doubt from reports in the media, that the law has already begun to affect the decision making of companies and executives regarding meals and entertainment.

Some companies are making immediate changes in how they use entertainment while others are waiting for more clarification. Some of the immediate effect will be mitigated by long term leases that eliminate the possibility of an immediate cancelation.  Still many businesses have already begun to feel the effect with companies cancelling their season tickets and restaurants feeling a slowdown of their corporate business.

The IRS is expected to give more clarification come summer.  That the law will have an effect is inevitable, and those who say it will have little effect are whistling past the graveyard.  According to many reports, this legislation will have a huge effect on businesses who use hospitality and entertainment as a part of their business strategy.  What many are hoping for is that is that the overall drop in the tax rate from 35% or higher to 21% will be enough for companies to continue entertaining.

Opinions vary, and while some believe that this windfall may increase spending on hospitality and entertainment.  The consensus is that this will be bad for corporate entertainment at all levels and for the bottom line of those businesses that cater to them.  If you aspire to the belief, as many people do, that entertainment and hospitality is integral to the bottom line of many businesses – than a negative effect on their bottom line is likely as well.

Strategies Being Considered:

Among the many strategies that will be undertaken to adhere to the law while retaining the considerable benefits of business entertainment will be the use of sponsorships.  Like holiday parties and team-building outings, sponsorships will still be covered as a legitimate and deductible expense.  Many sponsorship contracts include advertising in the way of signage and announcements as well as access to tickets and suites.  However, it is possible that the value of the tickets and suites will need to be subtracted from the deduction.  Another potential strategy being discussed is to use the suites outside of event dates for meetings, education and training.

Some businesses will attempt to recategorize entertainment expenses as something that is deductible such as advertising or public relations.  However, any such strategy comes with high risk, not the least of which is an audit from the IRS or worse.  Of course, reputable accountants will carefully consider any such strategy and nix it if it seems illegal or unethical.

Staples Center Suite

Suite at Staples Center” by winni3

Others will simply cancel their long-term leases and begin to meet their entertainment needs on a game by game or single event basis.  This can lead to a residual effect on prices with a huge effect on the secondary market.

Ticket price could decline

A decrease in demand for premium tickets and luxury suites could potentially lead to a corresponding decrease in prices.  Depending on whether you are a supplier or consumer of corporate entertainment, this could be a plus or a minus.  The result to the public could be positive with greater availability and lower prices.  This would mostly effect those at the top of the ticketing chain.

Effect on the Secondary Market

The secondary marketplace will surely reap a benefit as companies reluctant to invest in high dollar suites search out less expensive options on the secondary marketplace.  Firms such as The Suite Experience Group and SuiteHop will stand to benefit the most as they have already entered the market and have established relationships and technology to meet the demand.  On the other side of the coin, more companies with suites and luxury boxes will attempt to recoup the lost deduction by monetizing their unused seats on the secondary market.  Additionally, teams and venues, facing the potential loss of business, may have to change their strategy, if they haven’t already, and become active partners in the reselling of premium seats and suites or lose out on this revenue.

Diners toasting

by Johnn Joh

Business scrutinizes expenditures

One result of the new law will be that business will be taking a closer look at the benefits and costs of hospitality and entertainment. How this will affect the market is yet unclear.  Ultimately, it comes down to ROI.  Those firms that track and study the verifiable benefits of entertainment may see it as an indispensable part of their business continue with their entertainment budgets unchanged.  Most corporations see the value to building and maintaining relationships and the good will that comes with well thought out and strategized entertainment and hospitality.

For those firms that were just using the deduction to fund the high life for themselves and their employees, the good old days may be over,

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