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Travel and Entertainment Expenses

November 29th, 2010 Leave a comment Go to comments

Last week’s post focused on how the self-employment (SE) tax is imposed on the gambling winnings of professional gamblers and income earned from poker coaching.  The SE tax is not imposed on the gambling winnings of recreational gamblers.  Although the SE tax regime as it applies to gamblers seems to favor recreational gamblers, this apparent tax gap is narrowed:

Professional gamblers, but not recreational gamblers, may deduct “ordinary and necessary” expenses related to the trade or business of gambling.  These deductions are also available for poker coaches.

The terms “ordinary and necessary” are enclosed in quotation marks because that is the language used in the tax code.  Generally, ordinary expenses are common and accepted in the trade or business, and necessary expenses are helpful and appropriate for the business.  Various types of expenses may qualify as ordinary and necessary, including travel expenses (transportation, lodging, and meals) and entertainment expenses (including entertainment-related meals).

Travel Expenses

A taxpayer may deduct travel expenses incurred for one’s profession only if traveling away from his/her “tax home.”

The tax home is the taxpayer’s regular place of business, regardless of where the family home is.  If the taxpayer does not have a regular place of business, then the tax home is where the taxpayer regularly lives.  Note:  If the taxpayer does not live at his/her tax home, there is no allowable deduction for the cost of traveling between the tax home and family home.

Some types of deductible expenses incurred by traveling away from one’s tax home:

  • Travel by airplane, train, or bus between the tax home and business destination;
  • Fares for transportation between the airport and hotel; and
  • Lodging and meals if the business trip is overnight

Expenses for meals that are lavish or extravagant, however, are not deductible.  The lavish or extravagant standard is one of reasonableness, depending on the facts and circumstances.  An important limitation regarding the meal deduction is discussed below.

Entertainment Expenses

Ordinary and necessary business-related entertainment expenses (including entertainment-related meals) are deductible only if they meet either the (i) directly-related test or (ii) associated test.

The directly-related test requires: (1) the main purpose of the combined business and entertainment to be active business conduct of business; (2) actual business activity during the entertainment period; and (3) more than a general expectation of income or some other specific business benefit.  Note:  There need not be an actual business benefit resulting from the entertainment expense.  If, however, the situation has “substantial distractions” preventing the facilitation of conducting business, the expenses may not be directly related.

The associated test requires the entertainment to be: (1) associated with the active conduct of the taxpayer’s trade or business, and (2) directly before or after a substantial business discussion.  The active conduct standard requires a clear business purpose for the expense.  The substantial business discussion is another facts and circumstances determination.

The 50% Limitation

Caveat to the above discussion:  Only 50% of business-related meal and entertainment expenses are deductible.  This limit applies to business meals or entertainment expenses incurred while traveling away from the “tax home” on business or entertaining business associates at any location.  Note that the 50% limit does not apply to transportation to and from a business meal or business-related entertainment activity.  The 50% limit is applied after determining the amount that otherwise would qualify as a deduction.

To conclude, this blog has covered significant parts of the income and deduction components to poker taxation.  Next week the gear will shift to the audit side:  How taxpayers substantiate their income and deduction reportings associated with gambling.

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  1. Fivecardarmy
    May 10th, 2011 at 16:56 | #1

    Your posts are excellent. I posted this questions on deuces cracked but Ill post here too. I have no income other than poker. I file a joint return as a gambling professional. I claim $100K in gambling winnings and $90k in gambling losses. I also have $30k in poker operating expenses (car, travel, hotel, etc.) My wife is an employee and has income of $60K. Will my operating deductions in excess of my net poker winnings ($10k) net against my wife’s income? Also, How long can I file as a professional gambler and not have any profits net of deductions? Is it possible to get by on losses for years if I show intent or possibility to have positive income if the 1st place prize in tourneys I place was a $1million payout? Thanks in advance for your time.

    • May 10th, 2011 at 20:46 | #2

      The answer to your first question is yes. In fact, back in January, the U.S. Tax Court ruled on this very issue, and I wrote about the case here. What I didn’t mention in my post is that the petitioners filed a joint tax return, like the hypo you describe. One minor difference between your hypo and the Mayo case is that in Mayo, the petitioner tried to deduct gambling losses beyond the extent of gambling winnings; the court disallowed these. The “ordinary and necessary” business expenses that exceed a professional gambler’s “net” gambling winnings (0 or greater), however, is deductible, and may be reported as a business loss, and applied against other income on a joint tax return.

      There is no straightforward answer to your second and third questions. As you probably know, the professional v. recreational gambler determination is based on each taxpayer’s facts and circumstances (See Groetzinger). If a taxpayer has actual intent to derive a profit from gambling and spends significant time gambling, it is possible an argument could be made the taxpayer is a professional gambler, despite showing overall gambling losses for the year. At least we can say that argument was successful in Mayo.

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