Golf tournament club payouts: Expense or reduction to entry fee?

[shofco]

Our golf tournament club takes in entry fees and dues from members for about 25 tournaments per year.  We also make payouts to winning players. 

But we are questioning how to treat tournament prizes.  Some have suggested that tournament prizes should be considered a refund of entry fees, effectively reducing our revenue instead of increasing our expenses.   The intended effect is to eliminate 1099 reporting for our members since, on the year, payout  money never exceeds fee income.

Is this accounting treatment common or would it be way out there?  

[ReginaM]

No, it would not be correct accounting treatment to reduce prizes and awards by the entry fees.

The IRS 1099-Misc instructions require you to report Prizes and Awards in Box 3, Other Income.  The individual who receives the Prize would be required to report the Fair Market Value of the Prize on his tax return.

The winner would be allowed to claim the cost of entry fees as an expense for earning the prize.  Unfortunately, it would be claimed as an itemized expense for most individuals. 

If  the individual is a professional golfer,  the income and expenses could be reported on a Schedule C as Business Income and Expense.

[shofco]

Thanks so much, Regina.  Unless our members are delusional, we aren't professional golfers, so no schedule C for us!

But maybe I should have mentioned that we don't actually make payments for prize money to our tournament winners. Instead, we just reduce or eliminate their fees for the next tournament.  Does that make a difference?

Also, are you suggesting that our members treat these as hobby income and expenses? I understood that beginning with 2018, hobby expenses are not deductible at all.

[ReginaM]

That is very helpful information.  If you are reducing or eliminating their fees for the next tournament, the benefit that they receive is still taxable.  

You are correct about Hobby Expenses going away in 2018.  Your golfers may still be able to treat  the activity as a for-profit business and rightfully deduct the losses.  Basically, they  must demonstrate an honest intent to make a profit.  Factors that can prove (or disprove) such intent include:

• Conducting the activity in a business like manner by keeping good records and searching for profit making strategies.
• Having expertise in the activity or hiring advisers who do,
• Spending enough time to justify the notion that the activity is a business and not a hobby,
• Success in other ventures, which indicate business acumen,
• With elements of personal pleasure though, the IRS is far likely to claim that it is a hobby if losses start showing up on the tax returns.