Business Expenses: Entertainment
We’re going to be posting a series of blogs about common business expenses. Hopefully this will give you an overview of what expenses are deducted from gross receipts in calculating taxable business income.
Entertainment expenses are an area which the IRS often scrutinizes closely. Therefore, it is important to be able to support your deductions. Generally speaking, expenses to entertain a client, customer, or employee are deductible. There are guidelines regarding how this is defined by the IRS. There is also a list of entertainment expenses which are never deductible.
For any business expense to be deductible, it must be an ordinary and necessary expense for carrying on a trade or business. There are several types of expenses that will be ordinary and necessary to multiple businesses. Conversely, there are expenses which will be specifically with one type of business. This is the first question to ask when determining whether or not your entertainment expense will qualify for a business deduction.
Tests to be Met
Once you determine that the expense is ordinary and necessary for carrying on your trade or business, the entertainment (any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client) must be directly-related or associated.
To be directly-related it must:
- Take place in a clear business setting OR
- The main purpose of entertainment is the active conduct of business AND
- The taxpayer has more than a general expectation of getting income or some other specific business benefit
- Entertainment is associated with the taxpayer’s business AND
- Entertainment occurs directly before or after a substantial business discussion
The following expenses have limited deductions or are not allowable deductions:
· Facility rental
· Country club dues
· Cruise ships
· Luxury sky boxes
· Hunting lodges
Documentation is required. The expense may easily be disallowed if the following documentation is not available:
1. Itemized bill (must show what has been purchased)
2. Documentation of what the business purpose was of the meeting.
Only 50% of the cost is deductible when it comes to meals and entertainment. Keep that in mind!
This isn't a meal or entertainment expense, but is such a short topic, that we decided to tack it on here. Simply put, your business may deduct gifts to employees, clients, or customers. The cost of the gift cannot exceed $25 per person per year. Incidental costs of wrapping or shipping are not added to the $25 limit. If the cost is $4 or less, it below de minimis, so does not need to be reported. Advertising items are not included as a business gift. So, if you send your clients a magnetic calendar with your business information on it, it is not considered a business gift, but an advertising expense.
Be on the look-out for the next posting about business expenses...