Free Play - Interesting Article

Kind of interested in the tax treatment of free play for the casino.  Do they get to deduct the entire amount of free play as an advertising/promotional expense or just expected loss?

It's a bit more convoluted than that, and is similar to the treatment of things like coupons and such that retailers send out. The free play amounts provided to players' club members that may or may not be redeemed (such as in mailers) are treated as "contingent liabilities" on the balance sheet--an accounting term for "something we may have to cough up if something occurs." At the end of the accounting period and/or the expiration of the offers, the amounts that were actually redeemed are treated as a promotional expense, the same way any payment to remove a liability would be. The amounts that were not redeemed are subtracted from the contingent liability balance.

Free play that is awarded directly as the result of play is treated similarly, since it could be redeemed any time from from two minutes from now to never. The accounting elves will maintain a running balance of earned but yet unredeemed free play as another contingent liability.

As you might suspect, the reason for this somewhat complicated way of doing things is that the IRS objected to casino freebies being reported as direct expenses when the actual amounts were smaller, because those freebies are never all redeemed--some are never cashed in before they expire. I refer here to free play; comps are indeed recorded as direct advertising/promotional expenses, but only at cost, not at retail. (That was the result of another IRS ruling, when they stated that the casino doesn't spend $200 when it comps a $200 room. There has been some kerfuffle about that, because the casinos argued that the comp stopped them from getting $200 in revenue from selling the room to someone else. That one didn't fly with the IRS.)

The casinos vs. the tax man battle has being going on for decades, and is kind of interesting, with many twists and turns--I wonder if there's a book out there somewhere. Generally, the IRS has had the upper hand.