How to Deduct Entertainment Expenses
If you entertain clients or customers, you may deduct up to 50% of these costs. Be sure to keep good records of who was present, the dates and times, and the reasons for the entertainment and business discussions that took place.
More Guidelines on Deducting Meals and Entertainment Expenses
- The expenses must be “ordinary and necessary” business expenses
- The expenses must meet one of two tests:
- The directly related test applies if you can show that the main purpose of the activity was business. For example, if you are meeting with clients in your office, meal expenses during the meeting would probably meet the “directly related” test.
- The associated test applies if the expense is associated with (along with, in conjunction with)a “substantial” business discussion. For example, if you had a meeting with clients at a restaurant and then you take the clients to the theater, this might satisfy the “associated” test.
Included in the 50% limit are:
- Taxes and tips relating to a business meal or entertainment activity,
- Cover charges for admission to a nightclub,
- Rent paid for a room in which you hold a dinner or cocktail party, and
- Amounts paid for parking at a sports arena.
Meal and Entertainment Expenses NOT Subject to the 50% Limit
You may deduct meals provided to employees. If the food or beverages you provide to employees qualify as a de minimis benefit (that is, they are small amounts provided occasionally), you aren’t limited to the 50%. You can deduct the full cost. Examples of de minimis food and beverages for employees might be coffee and donuts at a staff meeting or an occasional pizza if employees must work overtime. The deduction limit on meals is discussed in chapter 2 of IRS Publication 535 – Business Expenses.
If the expenses aren’t considered to be de minimis, they are subject to the 50% rule.
Some meal and entertainment expenses may be fully deducted. That is, your deduction doesn’t have to be limited to 50% on these activities:
- At an event to promote goodwill in the community, like sponsoring a community event.
- At an event at which the proceeds go to a charitable organization (check to be sure the charity meets IRS qualifications)
- If the meal or entertainment is an essential part of the business function, as with a restaurant critic, food blogger, or sports reporter.
- For meals for employees at the convenience of the employer (as in a case when employees must work overtime), or for an occasional event, like the annual employee picnic.