What Business Entertainment Expenses are Deductible?
Entertaining customers is part of the sales function of many businesses. And paired with meal expenses, entertainment expenses are often considered a package. After all, we have to eat while we are being entertained. Meals and entertainment are a legitimate business expense. But because these expenses can be misused and mixed up with personal expenses, the IRS keeps a close eye on them in audits.
The 2017 Tax Reform Law made some drastic cuts to entertainment expenses and many entertainment expenses are no longer deductible. Beginning with the 2018 tax year, here's what has changed:
- Business lunches are still deductible at 50%. So, a businessperson or salesperson can take a client to lunch to discuss business and an employee eating lunch while traveling are still deductible.
- Taking a client or customer to an "experience" is no longer deductible. For example, a box at the ballpark, tickets to a concert, or a golf outing with clients is not going to be deductible. To be clear, expenses for entertaining clients are no longer deductible as business entertainment expenses.
Entertainment for the Benefit of Employees
The new tax law also allows a company to deduct expenses for entertainment for the benefit of employees, except for highly compensated employees. For example, your company picnic or holiday party for employees can meet the test. A catered meal for employees at your office or elsewhere at your business location for the purpose of presenting employee awards would also probably be deductible as a business expense and it would be 100% deductible. The main purpose of a hunting or fishing trip can't be directly tied to your business.
Those expenses have never been, and continue not to be, deductible.
Entertainment Expenses vs. Advertising and Promotion Expenses
If your business entertains the general public for the purpose of advertising or promotion, this cost is fully deductible as a business expense.
For example, if a children's clothing store pays for the expense of hiring a clown at a community event, that might be considered promotion rather than entertainment.
For More Information
For more detailed information on entertainment expenses, see IRS Publication 463. Check to make sure you are looking at the 2018 version, which includes the new tax law provisions.
The information and examples in this article should not be considered to be tax advice. The new tax law is complex and every business situation is unique. Before you deduct any business expenses, check with your tax professional.