Business Entertainment Expenses
As a business owner, you are eligible to deduct certain expenses related to entertaining clients. The expenses must be ordinary to the business and/or helpful to the business, and cannot be lavish or extravagant. Basically, the entertainment can’t be something out of the ordinary and out of the normal budget. The entertainment expenses are limited to a 50% deduction limit.
To be sure the entertainment expense is eligible for deduction it must fall into one of two categories, “directly related” or “associated with”. Entertainment expenditures will be considered directly related if the expenses were incurred in a clear business setting or the taxpayer can show 1 of 3 things:
- The taxpayer had more than a general expectation of deriving income or some other specific benefit.
- The taxpayer did engage in a business meeting, negotiation, discussion, or other bona fide business transaction during the entertainment period with the person being entertained.
- The main purpose of the combined business and entertainment was the transaction of business.
Even if you cannot show that the entertainment was “directly related” you may still be able to deduct the expenses if you can prove the entertainment was “associated with” your business. To meet this test, you must have had a clear business purpose when you took on the expense, and the entertainment must directly precede or come after a substantial business discussion.
Common Entertainment Expenses Questions
- Can I deduct my expenses to an entertainment facility? (yacht club, hunting camp, country club etc.)
- The answer is no, but also yes. No, you cannot deduct your dues to the facility, but you can deduct any out of pocket expenses you incur while at the facility. This includes food, fishing bait, catering, etc.
- Can I deduct my expenses if I host a party at my house for my employees?
- Yes, they are. You do not have to go somewhere to receive the deduction. if you hold a small party for clients and business associates at your home it may be deductible if you discussed business with your guests. Year-end parties for employees, as well as sales seminars and presentations held at your home, are generally 100 percent deductible provided costs for food and refreshments are reasonable and not lavish.
- If I buy tickets to a sporting event to host my client, is it deductible?
- Yes, it most definitely is barring all requirements above are met. It is limited to a 50% deduction limit. However, if you buy tickets to a charitable sports event, the full amount paid for the ticket and parking can be 100% deducted if the event was organized for the primary purpose of benefiting a tax exempt charitable organization. 100% of the proceeds must also go to the charity and the event led by volunteers.
Of course, there are many more scenarios and questions that can pop up at any time, the code for entertainment is quite lengthy. We only touched on a couple of questions for deductions you may be entitled to, so don’t hesitate to give us a call if you have any questions.John Pharr CPA
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