Business events and parties are a great way to celebrate and have fun, but they’re also great opportunities to market and promote your company or products, as well as build relationships and network with clients and associates to build your business. But business parties are not your ordinary business expense where the IRS is concerned. Uncle Sam is very strict with tax write-offs and has special rules when it comes to writing off entertainment expenses. Reporting them incorrectly can get your company into trouble with the IRS.
Who you invite and what transpires at the event determines how much of the expense you can deduct. Simply throwing a party to generate goodwill is not deductible and will be disallowed. The only exceptions to this is hosting a party for employees and their families, such as an annual holiday party, or hosting an event for the general public. In all other cases, the event must be directly related to the conduct of business or directly related to a substantial business discussion that takes place at some point during the event, either before, during, or after. Examples of relevant business elements include presentations, demonstrations, sales pitches, speeches, product displays, and product discussions. In addition, the environment must be conducive to conducting business. A loud environment, like a sports event, or a sales pitch that follows a party with significant consumption of alcohol may be rejected as impeding the ability to have an in-depth business discussion. IRS rules also state that the party or event cannot be lavish or extravagant. What constitutes lavish or extravagant is subjective and can be difficult to define, so keep it relatively simple to play it safe.
The guest list also determines how much of your event you can deduct. As previously mentioned, events for employees and their family members or the general public qualify for 100 percent deduction. No business discussion is required in these situations. Customers, prospective customers, and independent contractors associated with your firm qualify for the standard 50 percent entertainment deduction, but only if the event has a business purpose. Friends and family, including family members who are also employees, are not deductible.
If your event includes a mix of employees, clients, and family, it is important to keep track of the number of each so you know how to handle deductions. You will need to attribute the correct percentage of the total cost to each category and then take the appropriate deduction. For example, assume you spent $1,500 on an event for 75 people, with 25 attendees in each category. You would divide the total cost and attribute one-third, or $500, for each group of attendees. For the 25 employees, you can deduct the entire $500 that would be attributed. For the 25 clients, you can deduct half of the amount attributed to them, or $250. For the 25 family members and friends, you cannot deduct any of the amount.
Documentation is critical in ensuring your deduction is allowed. This should include:
- A copy of the invitation, which should clearly indicate the business purpose of the event.
- A copy of the guest list, totaled by employees, customers, and friends and family. You can have attendees sign a guest book or track RSVPs.
- Keep all receipts, invoices, and cancelled checks or credit card receipts.
- Video of the relevant presentations, speeches, or business discussions or photographs of guest viewing product displays or demonstrations are a good idea to have as proof that you met the requirement of a relevant business purpose.
Make sure all of your documentation is maintained in your tax file. Ensure that your bookkeeper or tax professional is aware that the event included employees so that it is properly reported at tax time. Otherwise it may be reported under the 50 percent entertainment rule, costing you a valuable write-off.