The days when executives could routinely deduct thousands of dollars in country-club dues as a business expense are long gone. The 1993 tax law, which prohibits taxpayers from writing off expenses stemming from clubs operating for business, pleasure, recreation, or other social purposes, pretty much put the last nail in that perk's coffin. But some "clubs" still qualify for a tax break.
To clarify the broad wording on clubs in the 1993 law, the Internal Revenue Service recently issued a list specifying which clubs are still deductible and which ones aren't. It should come as good news to small-business owners that you can write off dues for civic or public-service organizations, such as Kiwanis, Rotary, and Lions Clubs. Memberships in the local Chamber of Commerce, professional or trade associations, real estate boards, boards of trade, and business leagues are deductible as well.
How do you figure out what's verboten if your club isn't on the IRS list? The law hinges on a somewhat fuzzy distinction between whether or not one of the club's principal purposes is to provide entertainment. The new regulations even state that if one of the organizations otherwise excepted from the rule provides entertainment to its members as a primary purpose, its dues are not deductible. That provision may be intended to block deductions for clubs that are civic in nature but have an important entertainment focus, such as New Orleans Carnival clubs, says Thomas Brantley, senior editor at Research Institute of America, which tracks changes in tax law.
For the most part, the IRS list of the clubs whose dues definitely are not deductible includes the usual suspects: country clubs, golf and athletic clubs, and business-lunch clubs. The only surprise is that dues for airline and hotel clubs don't meet IRS approval, says Carol Caruthers, national director of personal financial services for Price Waterhouse. "I don't think there are very many people who see those as party places," she says. Rather, airline clubs provide work or meeting space for business travelers before or after flights.
KEEP TABS. Just because you can't urite off dues doesn't mean you can't use your club for business. If you and a potential client spend the afternoon at your athletic club, the IRS still lets you deduct expenses such as guest fees and meals. Then, the usual rules for travel-and-entertainment costs apply. You must show you needed to spend the money to conduct business, and when documenting expenses, you must include the business relationship and business purpose or benefit derived.
Elimination of deductions for most club dues has been a blow to the self-employed, says Linda Gimbel, spokesperson for National Small Business United. "For a small-business owner, networking at a club is like advertising." It may seem small consolation that you can deduct your Kiwanis dues when, in the old days, the government helped underwrite your country-club membership. But if you can shave a few dollars off your tax bill by belonging to an organization that benefits your business, you might as well join the club.