Entertainment of clients in the “ordinary and necessary course of your business” (meaning customary and/or helpful to) is a deductible business expense through the remainder of 2018. Starting in 2019, there are big changes to this deduction. Please refer to the link on the “Tax Cuts and Jobs Act” on the main page of our website for more information. Although stiffer requirements are in the works, there are still a lot of deductions allowed in this area. he best way to ensure you receive the maximum deduction is to meet the requirements listed below.
Method #1 – Receipts/Documentation
According to IRS Code section 1.274-5(c) and several notices and bulletins, only expenses over $75 per expense are required to have a receipt and backup. But, Auditors like to ignore that provision. Best to have the receipt and not need it than to need it and not have it.
Besides, keeping receipts is easy and will definitely go a long way to proving not only your entertainment expenses if you are audited but also the fact that you are diligent in your record-keeping. For receipts to be truly useful, they must have the following data:
Who you entertained – the name of the client or business
Where the entertainment occurred – the name of the restaurant or club
When it occurred – a specific date
Why the event took place – the purpose of the meeting
The amount of the entertainment costs – meal, tips, parking, etc.
Most restaurants provide receipts with the name of the restaurant, the date, and the costs plus tips. Therefore, for most business meals, keeping adequate documentation would consist of simply writing on that receipt the name of the client and the reason for the meeting such as: “Obtain referrals” or “Discuss Expansion” and then filing the receipt someplace safe.
You take a client and his wife out to Jaxon’s for dinner. Using your Credit Card, you pay the bill. The credit card receipt stapled to the restaurant receipt will provide the Date, Amount with tips, and the Place. YOU add “Mr. Jones and wife to discuss annuity plans for the business” and you’re done. File the receipt in a special “Entertainment Receipts” folder/file where it cannot get lost.
Method #2 – Discussing Business
The meal must take place in surroundings that are conducive to having a business discussion.
If, for example, you have your meal at the Improv or the Comedy Club, the IRS will deny the deduction because the environment is not conducive to a productive business meeting. Cocktail parties are another no-no. Also, you MUST be present (otherwise how could you discuss business?).
A brief list of common non-business settings includes: Nightclubs, Golf courses, Theatres, Sports events, Hunting/fishing/skiing or other sports-related trips
Method #3 – Deducting Non-Business Entertainment
These can be deducted under the ‘associated entertainment’ rules which is considered ‘GOODWILL’ entertainment and must precede or follow a substantial and bona fide business discussion – usually on the same day as the entertainment.
Season tickets and the like are deducted by event, but not as a package.
KEY – there must be a link between the business and the entertainment. To prove this, record the link in a log or on the tickets/receipt.
Let’s say you follow dinner at Jaxon’s with tickets to the El Paso Symphony. Attach your ticket stubs to the dinner receipt we previously mentioned, and add “followed by Symphony” and be sure to include your parking tickets and any drinks you buy to the package.
Method #4 – Entertainment as Gifts
When you have used your home for business, selling it can result in some undesirable tax consequences. However, a little pre-planning can go a long way to eliminate these. For example, under current laws, conversion of the property to personal use at least 3 full years and one day before the sale of your home after you reach the age of 55 can allow you to take advantage of the one-time taxable profit exclusion of up to $125,000 on the sale of a personal residence.
Anytime you are thinking of selling your home when you have used it for business, you should consult with your tax advisor about the current laws and how they might impact the sale of your home.
Method #5 – Exam-Proof the Home Office Deduction
Your home is already an environment conducive to discussing business. Therefore, any business meetings, including small parties (fewer than 12 business associates), can be deductible as long as you fully document the event as indicated in item #1 above.
For larger parties, you must establish a type of commercial motivation that can be presented to larger crowds such as “promotional meeting to introduce new product”. In this way, sales seminars and presentation can be given at home with a good party afterwards, and the whole thing is deductible (including utilities if you can track them).
KEY: Never mix business parties with personal ones such as birthdays or anniversaries. Uncle Sam WILL find out and deny you the deductions for the business part of the evening.
Method #6 – Deducting Office Parties, Club Dues and Lunches
The reasonable cost of holiday parties or summer get-togethers for your employees and their families is 100% deductible.
Dues to professionally-related clubs and/or organizations where you socialize with other professional and/or potential clients are fully deductible. This includes networking organizations where you are required to purchase a meal during the meeting.
The “Sutter Rule” allows the IRS at its whim to disallow a portion of your business meals when they absorb a substantial amount of your typical living expenses. Check with your professional on what that is for you.
NOTE ON MEALS : If you are not eating but actually making a presentation, the meal is not ‘entertainment’ but ‘promotional’ and fully deductible.