MEALS & ENTERTAINMENT

Business Entertainment Tax Deduction

Building relationships with your employees, contractors, vendors, advisors, competitors, etc. is key to being a successful entrepreneur. Often times, entertaining the aforementioned parties can help you win business, expand your network and show your appreciation for those you work with. The IRS considers entertainment costs as an ordinary and necessary part of doing business. Accordingly, your qualifying entertainment expenses may be 50% or in some cases 100% deductible.

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DEVELOPER / ENGINEER

Mr. Silverspoon is a talented programmer and website developer who has an idea for an application he believes will change the way people communicate. He would like to pitch his fantastic proposal to two other developers in the hopes of forming a team, he also wants to get them excited about the prospect of working together. Accordingly, Mr. Silverspoon purchased three tickets to the opera and made a dinner reservation for three at the penthouse restaurant downtown. All in all he spent $12,000 on meals and entertainment that evening. Mr. Silverspoon's accountant inquired about this big night out and advised his client that the incremental amounts he paid to secure his back stage opera passes and sit at the chef's table could be considered "lavish or extravagant" and rather than deduct the full $6,000 ($12,000 x 50%), he should only deduct $2,000 ($12,000 - $8,000 (extravagant portion) X 50%) since it would be considered a more reasonable night out for three.

ENTREPRENEUR

Gary is a master brewer who recently opened his own craft brewery in West Virginia. He organized an event at his new facility and invited hundreds of people to come taste his beer. To encourage his invited guests to purchase bottles, he let the tasting samples flow and discussed details of each brew. At the end of his event, Gary determined he poured $3,000 of free tastings. Since this event could reasonably be considered promotional, the full $3,000 of complementary alcohol could be deducted on his Schedule C.

REAL ESTATE AGENT

Cain is a real estate agent trying to close a deal with a new client. His client is a very busy woman who rarely makes time for anything in her life except baseball, so Cain proceeded to purchase two tickets to a National's baseball game, knowing that she wouldn't be able to resist his invitation. All in all he spent $440 dollars, which included the face value of premium tickets, food and drinks. During the game, Cain was finally able to convince his client to accept the outstanding offer on her home. Since the purpose of his entertainment was directly related to business, he will be able to deduct $220 (50%) on line 24b of his Schedule C. Note that if he paid over face value for his tickets, any amount exceeding face would not be deductible.

TASKER

Camilo is an independent contractor who specializes in electrical work. He has two hourly contractors who work directly under him on a project basis. To show his appreciation for their hard work, he decided to organize a weekend camping trip for everyone. He spent $300 on food and supplies for the event. Camilo could deduct $150 for this event on his Schedule C at the end of the year. Note that if Camilo had taken two employees (instead of two contractors) on the same trip, the full $300 likely would have been deductible.

PROFESSIONAL SERVICES

Ernest is a CPA who does bookkeeping and financial consulting for his clients. He often entertains clients outside of the office to discuss business. Ernest's standard engagement terms outline that his clients are responsible for reimbursing all related meal, travel and entertainment costs and Earnest adequately accounts for and reports these costs back to his client. Earnest would include his reimbursements as part of his gross income and deduct 100% of the reimbursed entertainment costs (net zero). His clients would then be subject to the 50% limitation rule.

HOW TO DEDUCT BUSINESS ENTERTAINMENT EXPENSES

You can generally deduct 50% of your business entertainment expenses if the purpose of the entertainment is directly related to business or if the entertainment occurs directly before or after an interaction directly related to business. Businesses may include but is not limited to discussing current projects, planning future projects, discussing industry trends, and pursuing leads that could generate future income, etc. Note that you do not have to meet any specific time requirement for business vs. entertainment, your event simply must occur for a legitimate business purpose.
Extravagant and / or lavish entertainment expenses are not allowed. There is no specific dollar value on what would be considered lavish, rather, it is based on what one would consider reasonable given the specific circumstances. If your entertainment is deemed lavish or Extravagant, the reasonable cost of your entertainment would be deductible and anything exceeding the reasonable threshold would be disallowed.
Generally, only 50% entertainment costs are deductible. However, if you incur costs to organize social events for low-paid employees, host promotional events, or provide meals to more than 50% of your employees on your premises for your benefit these costs could be 100% deductible.
Some entertainment costs are not deductible including but not limited to your country club membership and costs associated with renting an entertainment facility (i.e. private ski lodge, luxury boat, etc.) on a long-term basis. Also, note that if you rent a luxury / sky box on a long-term basis your deduction may be limited.
If you pay for entertainment for charitable purposes (i.e. you purchase two tickets to a play and the entire proceeds go to a qualified charity), some or all of these costs could be considered a donation and be 100% deductible on your Schedule A. Refer to our charitable deduction page for more details. Additionally, certain entertainment costs could be considered gifts (i.e. you purchase tickets to a sporting event for a client and you do not attend), and be deductible subject to IRS limits.
If you incur business entertainment costs while with a spouse, relative or friend you may not deduct any portion of their expenses unless they are your employee, partner, professional advisor, customer, or other party who joined you for a legitimate business purpose.

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IRS FORMS

Schedule C

IRS FORMS

Schedule E

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