Sponsorship expenses

[Jesse]

I have a mechanic/sporting good retailer that sponsors many local sports activities and they seem to get bigger and more involved sponsoring more and more activities each year.

Started out with a baseball team, the business pays the entry fee and buys t-shirts and hats with the business name printed on them. They've grown to add volleyball, dart, and horseshoe teams. The sponsor fees and promo items I feel can be justified.

This year the business is sponsoring a Quad racer and they actually bought this 4 wheeled machine for the racer. The racer spends mega-bucks at the shop and was talking about switching to a different dealer so the mechanic offered him the machine to keep his business.

Does this sound legit? Would you expense the cost of the machine?

[spencer]

Well,

what kind of money are we talking here? I usually call that stuff advertising but an out of sync amount might raise a flag, I suppose. See what others say. Actually, I think it's a legit deduction in an effort to keep business. No different than offering a discount on merchandise.

[Jesse]

We are talking cost of quad approx $4,000. The customer spends a minimum of $1,500 a month in parts and repairs from May through October.

Would I be pushing it to just expense the cost of the quad through COGS?

[Jesse]

I put this on the back-burner, however now I must decide how I need to handle this for 2010 tax return.

Anyone else have similar situation? Any opinions?

[Davc]

Clarify "bought for the racer". Given to the racer to use or does the racer actually own it?

Expensing it as COGS is obviously wrong and would subject you to preparer penalties if you were caught.

[Jesse]

The machine is given to use.

Remain in inventory until actually sold?

Eventually the machine will be sold but surely the used machine will not retain it's value and sold for less then originally purchased.

[Burke]

Unless the client normally buys and sells racers in the normal course of his business (in which case it would be inventory), it would seem to me to be a fixed asset subject to depreciation. Then treated as a sale of 1245 property when disposal occurs. The gradual deduction each year would more realistically reflect the actual use. However, I suppose it would be eligible for 179 under current rules?

[Jesse]

Thanks for responding. I'm leaning towards depreciation as an advertising/demo model. It has been a great advertising tool for the business and it seems it should be a legit business expense for this type of business but with preparer penalties flying I worry about it being to aggressive?

[Burke]

I would be more than comfortable with the depreciation route under the circumstances of use as you describe.