Travel and Entertainment Expenses
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).
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.
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.