Business Entertainment Expenses
a business owner, you are entitled to deduct certain expenses
on your tax return such as those relating to entertaining
Entertainment is considered any activity that provides
entertainment, amusement, or recreation.
It may also include meeting the personal, living, or family
needs of individuals including providing meals, a hotel suite,
or a car to customers or their families.
A meal that you provide to a customer or client may also be
considered a form of entertainment. The meal may be part of
other entertainment or stand alone. Meal expenses are defined
as the cost of food, beverages, taxes, and tips for the meal.
To deduct an entertainment-related meal, you or your employee
must be present when the food or beverages are provided, and
you cannot deduct a meal as both a travel and entertainment
LIMITS AND RESTRICTIONS
Entertainment expenses are generally deductible at 50 percent.
Entertainment costs, taxes, tips, cover charges, room rentals,
maids, and waiters are all subject to the 50 percent limit on
Entertainment expenses are also subject to certain limits and
restrictions such as whether they qualify as "ordinary and
necessary" and not "lavish or extravagant." They must also be
directly related to or associated with, your business and you
must keep detailed records substantiating your expenses (more
on this below). Furthermore, the person you entertained must
be a business associate; that is, someone who could reasonably
be expected to be a customer or conduct business with you such
as an employee, client, or professional advisor.
If it is customary to entertain a business associate with his
or her spouse and your spouse also attends, entertainment
expenses for both spouses are deductible, thanks to something
called the "closely connected rule." For more information
about this topic, please contact the office.
you are an employee who is reimbursed in full by your
employer different tax rules apply (e.g. you are not
subject to the deduction limits).
LOCATION MUST BE CONDUCIVE TO BUSINESS
Entertainment expenses are only deductible when they take
place in a location conducive to business. A nightclub or
theater is not considered a place conducive to business, but
your home is. For example, if you hold a small (less than 12
people) party for clients and business associates at your home
during the summer it may be deductible as long as you
discussed business with your guests. The amount of time that
business was discussed is not significant.
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.
Out-of-pocket expenses for food and beverages, catering, gas,
and fishing bait provided at facilities you own or are a
member of such as a yacht, hunting lodge, fishing camp,
swimming pool, and tennis court are deductible subject to
entertainment expense limitation of 50 percent. However, you
may not deduct expenses related to the depreciation and upkeep
of the facility or for rent and utilities.
paid to country clubs, social, or golf and athletic
clubs are not deductible.
If you rent a skybox or other private luxury box for more than
one event at the same sports arena, you generally can't deduct
more than the price of a nonluxury box seat ticket. You can,
however, count each game as one event. Deduction for those
seats is then subject to the 50 percent entertainment expense
limit. If the cost of food and beverages are on a separate
receipt, you are allowed to deduct those expenses (as long as
they are reasonable) in addition to the amounts allowable for
the skybox, subject of course, to the requirements and limits
EXPENSES MUST BE
"DIRECTLY RELATED" OR "ASSOCIATED WITH"
Expenses are directly related if you can show that there was
more than a general expectation of gaining some business
benefit, rather than simply goodwill. In addition, you must
show that you conducted business during the entertainment and
that the active conduct of business was your main purpose.
Even if you cannot show that the entertainment was "directly
related" you may still be able to deduct the expenses as long
as 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.
Tax law requires you to keep records that will prove the
business purpose and amounts of your business entertainment as
well as other business expenses. The most frequent reason that
the IRS disallows entertainment expenses is the failure to
show the place and business purpose of an item. Therefore it
is paramount that you keep excellent records.
To substantiate entertainment expenses you must show the
- The amount of each separate expense.
- The date, time, place, and type of entertainment (e.g.
- The business purpose and nature of any business discussion
that took place.
- The business relationship and the name, title, and
occupation of the person or people you entertained.
DON'T MISS OUT
Tax law is complicated, and this article only touches on a few
of the deductions for entertainment expenses you might be
entitled to. If you have any questions about entertainment
expenses or need assistance setting up a recordkeeping system
to document your business-related activities, don't hesitate
If you have any questions about business entertainment
expenses in your company, please call us at 301-657-8080.
DID YOU KNOW
that Sullivan & Company manages Pension Funds,
Retirement Plans & Taxable Accounts through Archer
Investment Corporation & Fidelity Investments for our
Fidelity is the custodian for more
retirement plans than any other custodian in the United
Let Sullivan & Company Analyze Your Asset Allocation
& Risk Tolerance for FREE!
Management at Sullivan & Co. CPAs
Sullivan leads our
Group and is here to help you navigate your
financial future. As Investment Advisor Representatives,
he and our Wealth Management team are able to provide an independent opinion on the
investments you already own or are considering buying.
We can structure a portfolio
based on your risk tolerance or we can help you decide how
to invest in your company 401(k) plan.
We work with each
client to identify their concerns and to provide solutions
according to their situation.
is also experienced in company retirement plans. If you own
a business that does not have a plan; we can discuss your
options and set up a plan that fits your company.
If your business already has a
plan; we offer a free evaluation of the plan to ensure that
it is up to date and working well for you and your
Our goal is to provide personal, unbiased and independent
advice to help you make well-informed decisions about your
financial life and investments.
Contact Chris Bailey, CPA, MBA, IAR or Ben Perron, CPA, IAR
or Paul Sullivan, CPA, IAR to set up a free
initial consultation (301) 657-8080.
And as always if you have any questions about accounting or
investments and how they effect you or your business, please
give us a call. We can help guide you in the right
you can call our offices if you have any questions about these
or any other accounting, tax, financial planning or insurance
related issues, at 301-657-8080.
Regards, Paul Sullivan, CPA, IAR
President, Sullivan & Company