Business Entertainment Expenses
Entertainment expenses that are ordinary and necessary and are
related to your business, and are for the purpose of entertaining
to carry on your trade or business, may be deductible.
For expenses to be deductible, they must meet one of two
tests:
- Directly-related test
- Associated test
Directly-Related Test
For business entertainment expenses to be deductible under as
directly related expenses you must be able to show:
- You had more than a general expectation of a specific business
benefit or getting income at a future time.
- You engaged in business with the person being entertained
during the entertainment period.
- The main purpose of the entertainment was to actively conduct
business.
- The expenses were incurred by the taxpayer and a person with
whom the taxpayer conducted business, or would have conducted
business with if circumstances were not out of the taxpayer's
control, during the entertainment period
OR
- The entertainment occurred in a clear business setting directly
promoting the taxpayer's trade or business.
- Either of the following must be true:
- The expenses were paid directly or indirectly to someone, who
is not your employee, for compensation of services.
- The expenses were paid as a prize or award, which is required
to be included in the recipient's gross income.
Associated Test
For business entertainment expenses to be deductible under the
associated test you must be able to show the following:
- The entertainment was associated with the active conduct of
your trade or business.
- The entertainment directly preceded or followed a substantial
and bona fide business discussion.
Deductible Expenses
You must have records to prove the business purpose of the
entertainment, and the amount of the expense. The records must
indicate:
- Event date
- Event location
- Business relationship of persons entertained
- Event expenses
Entertainment includes any activity generally considered to
provide or constitute entertainment, amusement, or recreation:
- Night clubs
- Social events
- Theaters
- Sporting events
- Athletic clubs
- Yachts
- Hunting and fishing vacations
- Events similar to these
Generally 50% of meal and beverage expenses are deductible,
however, you or an employee of yours must be present at the meal in
order for any of its cost to be deductible.
Non-Deductible Expenses
You cannot deduct:
- Any dues paid for membership in any club organized for
business, recreation, pleasure, or other social purposes
- Any expenses paid for operating expenses incurred to maintain a
facility used in connection with entertainment
For more information, see IRS
Publication 463.