Some of your most important business meetings, client contacts, and marketing efforts may take place at restaurants, golf courses, or sporting events. The tax law recognizes that much business is mixed with pleasure—in the form of meals and social events—and permits you to deduct part of the cost of business-related entertainment. Let’s look at what’s allowed with the meal deduction, as well as other entertainment costs that you can write off.
Because many taxpayers have abused the meal deduction in the past, the IRS has imposed strict rules limiting the types of entertainment expenses you can deduct and the size of the deduction. Let’s define a few of the terms when it comes to the entertainment deduction and the meal deduction.
What Is Entertainment?
Entertainment involves something fun, such as:
- dining out
- going to a nightclub
- attending a sporting event
- going to a concert, movie, or the theater
- visiting a vacation spot (a ski area or beach resort, for example)
- taking a hunting, yachting, or fishing trip
Eating out it is by far the most common business entertainment expense and makes up the largest dollar portion of most taxpayers’ entertainment deductions.
Who You Can Entertain
You must be with at least one person who can benefit your business in some way to claim an entertainment expense. This could include current or potential:
- independent contractors
- professional advisers.
This list includes almost anyone you’re likely to meet for business reasons.
Business Discussion Requirement
Years ago, you could deduct entertainment expenses even if business was never discussed. For example, you could deduct the cost of taking a client to a restaurant, even if you spent the whole time drinking martinis and talking about sports (the infamous “three-martini lunch”). This is no longer the case—you must discuss business with one or more business associates either before, during, or after a social activity.
Business Discussion Before or After Entertainment
The easiest way to get a deduction for entertainment is to discuss business before or after the activity. To meet this requirement, the discussion must be “associated” with your business—that is, it must have a clear business purpose, such as developing new business or encouraging existing business relationships.
You don’t, however, have to expect to get a specific business benefit from the discussion. Your business discussion can involve planning, advice, or simply exchanging useful information with a business associate.
You automatically satisfy the business discussion requirement if you attend a business-related convention or meeting to further your business. Business activities—not socializing—must be the main purpose for the convention. Save a copy of the program or agenda to prove this.
Generally, the entertainment should occur on the same day as the business discussion. However, if your business guests are from out of town, the entertainment can occur the day before or the day after the business talk.
You can get a deduction even if the entertainment occurs in a place like a nightclub, theater, or loud sports arena, where it’s difficult or impossible to talk business. Because your business discussions can take place before or after the entertainment, the IRS won’t be scrutinizing whether or not you actually could have talked business during your entertainment activity.
Business Discussion During Entertainment
Another way to make your entertainment expenses deductible is to discuss business during an entertainment activity. To get the deduction, you must show all of the following:
- The main purpose of the combined business discussion and entertainment was the active conduct of business; you don’t have to spend the entire time talking business, but the main character of the entertainment must be business.
- You did, in fact, have a business meeting, negotiation, discussion, or other bona fide business transaction with your guest or guests during the entertainment.
- You expect to get income or some other specific business benefit in the future from your discussions during the entertainment—thus, for example, a casual conversation in which the subject of business comes up won’t do; you must have a specific business goal in mind.
This deduction is usually limited to business discussions held during meals. In the IRS’s view, it’s usually not possible to engage in serious business discussions at other types of entertainment activities because of the distractions.
Calculating Your Deduction
Most expenses you incur for business entertainment are deductible, including meals (with beverages, tax, and tips), your transportation expenses (including parking), tickets to entertainment or sporting events, catering costs for parties, cover charges for admission to night clubs, and rent you pay for a room in which to hold a dinner or cocktail party.
You are allowed to deduct only 50% of your entertainment expenses. For example, if you spend $50 for a meal in a restaurant, you can deduct $25. (Even though you can deduct only half of the expense, you must keep track of everything you spend and report the entire amount on your tax return.) The only exception to the 50% rule is for transportation expenses, which are 100% deductible.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.