If you incur expenses related to your business, you may be able to deduct those expenses on your tax return. In a previous article, we touched on deductible business-related travel expenses. This publication is focused on travel-related entertainment expenses.
Entertainment expenses related to your business can be deducted if they are ordinary and necessary and pass one of the following two tests:
- Directly-related test
- Associated test
Ordinary expenses are ones that are commonly accepted in your line of business. Necessary expenses are ones that are helpful and appropriate in your line of business. Necessary expenses are not necessarily expenses that are required.
Directly-Related Test for Entertainment Expenses
The directly-related test requires that an entertainment expense meet all of the following requirements:
- The main purpose of the entertainment expense was to actively conduct business
- Business occurred during the period of entertainment
- You generally believe the business will lead to income or other business benefits in the future
During the period of entertainment, it is not necessary to devote more time to the conducting of business than to entertainment. However, the amount of business conducted cannot fall to the level of being an incidental part of the period of entertainment.
Although you must generally believe the business activity conducted during the period of entertainment will lead to income or other business benefits, you do not have to actually demonstrate that income or other business benefits were received as a direct result of the entertainment.
Associated Test for Entertainment Expenses
The associated test requires that an entertainment expense is:
- Associated with the active conduct of your business, and
- Immediately before or after a substantial business discussion.
An entertainment expense is associated with the active conduct of your business if you can demonstrate you have a clear business purpose for having the expense. The clear business purpose can be to obtain new business or to continue an existing business relationship.
A substantial business discussion is one where you can demonstrate you actively engaged in the discussion, meeting, negotiation, or other aspects of a business transaction to get a business benefit.
The 50% Limit for Entertainment Expense Deductions
Generally, you can deduct only 50% of business-related entertainment expenses. This 50% limit applies to employers, employees, and self-employed persons.
The 50% limit applies to business-related entertainment expenses while:
- Traveling away from home,
- Entertaining customers at your place of business or another venue, or
- Attending a business convention.
Deductible Entertainment Expenses
Deductible business-related entertainment expenses include the following:
- Expenses related to activities designed to provide amusement, entertainment, or recreation.
- Meals provided to customers or clients, including the cost of food, beverages, taxes, and tips.
Entertainment Expenses that are Not Deductible
You cannot deduct the following expenses as entertainment expenses:
- Club dues and membership fees.
- Fees for the use of an entertainment facility, including rent, maintenance, utilities, and depreciation. Entertainment facilities include but may not be limited an airplane, bowling alley, car, hunting lodge, swimming pool, tennis court, vacation resort home, or yacht.
- Gifts the individual will use at a later date.
- Expenses for your spouse or the spouse of your customers.
- Lavish or extravagant expenses. Lavish or extravagant expenses are those expenses not considered reasonable given the circumstances.
Where can I get additional information about deduction of business-related entertainment expenses?
If you have further questions about deduction of business expenses for entertainment, you should speak with a tax attorney. A tax attorney has the training and experience to answer questions about the deduction of entertainment expenses and to help you complete and file your tax return.
You can complete the form below or call the phone number located at the top of this web site to start getting help from a tax attorney, who can answer your questions and prepare your tax return. The initial consultation is free of charge, so you have every reason to get the help you need today.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.