Entertainment Expenses: What Can You Deduct?

One of the nice things about running your own business is that you can take a tax deduction for 50 percent of expenses related to entertaining clients, customers or employees. There are, of course, rules. For example, you can deduct entertainment expenses only if they are both “ordinary” and “necessary” and meet one of two tests: the “directly related” test or the “associated test.”

Let’s look at what those things mean. First, “entertainment” includes any activity generally considered to provide amusement, entertainment or recreation – including meals. An “ordinary” expense is one that’s common and accepted in your particular trade or business. And a “necessary” expense is one that is helpful and appropriate in a business context.

That leaves lots of room to include a wide range of business-related entertainment expenses. And keep in mind that an expense does not have to be “required” to be necessary.

Directly-Related Test

            Your entertainment expense will meet the directly-related test if:

  1. ExpensesThe entertainment took place in a clear business setting; or
  2. The main purpose was to actively engage in some kind of business (which you did), and you had more than a vague expectation of generating income or some other specific business benefit.

You don’t need to devote more time to business than to entertainment. And you do not have to show that the entertainment actually produced any income or other benefit for your business.  If the business discussion is only incidental, however, it doesn’t meet the test.

Club dues and membership fees are not deductible. This includes country clubs, golf and athletic clubs, airline clubs or hotel clubs. Expenses for use of an entertainment facility are also not deductible. This includes such things as a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane hotel suite or home in a vacation resort. You can, however, deduct expenses for food, drinks, catering, gas and fishing bait that you provided during the entertainment.

Associated Test

            You pass this test if the entertainment you paid for was associated in some way with your business or trade, and it took place directly before or after a substantial business discussion of some kind.

Keep in mind, however, that you cannot deduct expenses considered lavish or extravagant under the circumstances, and you generally can only write off half of the costs.  

The definition of lavish, however, is vague and depends on the circumstances. The IRS will not disallow a deduction just because it exceeds a certain amount or takes place at a deluxe restaurant, hotel, nightclub or resort.

Expenses subject to the 50 percent limit include such things as taxes and tips related to a business meal or entertainment activity, cover charges at a nightclub, room rental for a dinner or cocktail party and parking at a sports arena. However, according to the IRS, the cost of transportation to or from a business entertainment activity is not subject to the 50 percent limit.

The kind of business you have can determine what’s deductible as entertainment. For example, if you are a dress designer and hold a fashion show to introduce your designs to store buyers, the show is generally not considered entertainment. That’s because fashion shows are typical in your line of business.

But if you are an appliance distributor and hold a fashion show for spouses of your retailers, the show is generally considered entertainment, and expenses would be deductible.

Spouse Expenses

The cost of entertaining your spouse or a client’s spouse generally is not deductible. However, if you can show a clear business purpose, the costs are deductible.

For example, if you are legitimately entertaining a customer for business purposes and his or her spouse joins you because it would be impractical to entertain the customer without the spouse, the cost is deductible. And if your spouse joins the party because the customer’s spouse is present, that expense is also deductible.

These are only a few of the many rules and exceptions on deducting entertainment expenses. For more details, consult IRS Publication 463, Travel, Entertainment, Gift and Car Expenses available at www.irs.gov.


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About the Author

Daniel Kehrer, headshotDaniel Kehrer, Founder & Managing Director of BizBest Media Corp., is a nationally-known, award-winning expert on small and local business, start-ups, content marketing, entrepreneurship and social media, with an MBA from UCLA/Anderson. Read more of Daniel's tips at www.BizBest.com, follow him at www.twitter.com/140Main and connect on LinkedIn at www.linkedin.com/in/danielkehrer.
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