Tax law cuts into business entertaining
Deduction loss leads to rethinking of game and concert outings.
In Darryl Jacobs’ line of work, it’s a tough year to be a sports fan.
It has nothing to do with the performance of the tax attorney’s favorite teams. Instead, a tax code change that strips away a popular business-entertainment deduction has cut into his ability to hobnob with clients at sporting events, theaters and concert venues.
Jacobs, an attorney at Ginsberg Jacobs in Chicago, said the change has already affected the way his firm does business.
The firm bought half as many Cubs tickets this year as it did in 2017. Many of its White Sox season tickets, which used to be tax-deductible when used to entertain clients, are now being donated by the firm so that their cost can instead be deducted for charitable purposes. “What I’m seeing from my clients — and us too — we’re shying away from entertainment like concerts and sporting events,” Jacobs said. “It’s become a different environment now.”
Before this year, a business could deduct 50% of the cost of a ticket to an event when entertaining clients, whether for a ballgame, a concert or a theater performance. But under the tax reform act passed last year, that deduction is gone, although companies are still permitted to deduct 50% of the cost of business meals, including those that involve entertaining clients.
That change has caused headaches for businesses that rely on perks to seal client relationships. Some business owners and sports industry watchers say the elimination of the deduction could cause ticket and suite prices across sports stadiums, theaters and other venues to stall or decline as corporate clients cut back.
There are still unanswered questions about the change. For example: What counts as entertainment, and what can be categorized as a meal? A hot dog at the ballpark? Dinner after the game?
The IRS is expected to issue more details about the tax code change this summer. Until then, some firms are making immediate changes in how they entertain, but many others are “cautiously continuing what they did in the past,” said Brian Ray, a Maryland accountant who works for Hertzbach & Co.
In some cases, that’s not necessarily by choice.
Don Dickinson, founder and president of Chicago consulting firm Dickinson + Associates, leases a 25% share of a suite at the United Center sports arena. His company uses the space to host clients and prospective clients for about a dozen Blackhawks and Bulls games each season, and it has the option of using the suite for concerts.
He estimates that for his business and ones like it, the tax law change means $50,000 to $100,000 in entertainment expenses that are no longer deductible, but they are expenses he can’t immediately get out of.
“We’re in the middle of a lease that goes another two years,” Dickinson said. “When those [suite] leases come up, I can see a lot of businesses choosing not to renew.”
At the same time, he emphasized how important the suite experience has been for his business. He says entertaining clients at an event is a relationship-builder that often can’t be duplicated with a high-end dinner.
“You could certainly get a private room at Morton’s, spend the day with [the client] and then get to know them there,” he said. “But a lot of times, it’s the last thing they want to do.”
Dickinson said his firm has found that clients prefer attending sporting events and concerts. “They’d rather have nachos and a hot dog at a Bulls game than a fancy steak dinner.”
The atmosphere in a suite is also far more conducive to business, he said. It allows existing and new customers to interact, sharing information and getting to know one another “without salespeople hovering over them.” It’s a situation not easily replicable in a restaurant, he said.
Under Dickinson’s contract with the United Center, the company can’t resell nights at the suite, so scaling back there is not an option. But for businesses with suites at other venues, reselling the space may be an attractive alternative.
Scott Spencer, president of Suite Experience Group, a California company that sells space in luxury suites, said that although it’s too early to see the full impact of the tax change, he thinks many long-term suite leases will change hands in the next few years as contracts come up for renewal. As demand from heavy-spending corporate clients wanes, prices may fall too, he said.
Prices for seats at a stadium or concert venue vary widely but generally run no more than a few hundred dollars. Suites are much more expensive. The average cost of NHL and NBA suites can range from $2,000 to $8,000 per game, and MLB suites can run between $3,000 and $6,000, according to SuiteHop, another company that sells a la carte suite space.
Any contract changes made by businesses because of the new tax law may begin with hockey, baseball and basketball stadiums, which tend to have suite contracts that last three to five years, Spencer said. The NFL has the longest contracts, he said. Suite contracts at AT&T Stadium, home of the Dallas Cowboys, can stretch as long as 20 years.
SuiteHop Chief Executive Todd Lindenbaum said that although he sees the tax change as a “catalyst for people to take a look at what they’re investing in,” he doesn’t think the change will lead to a significant slowdown in the purchase of entertainment packages or suite shares.
“Take the Masters [Tournament] in Georgia — that’s a bucket list item. If you can take a client there, you can solidify a relationship forever,” he said.
But Jacobs, the tax attorney, sees a big potential impact.
“People say it’s not a big deal because it doesn’t include meals, but when businesses cut back, those entertainment venues will suffer,” he said. “Baseball parks aren’t going to sell out as much. When [businesspeople] eat less at the park, the vendors make less. I don’t think they realize there will be a real economic effect because of the reduction in spending at these events.”