How Do You Handle Entertainment Expenses?

When was the last time you took a client out to lunch? Do you entertain weekly or rarely? You could be missing a valuable tax deduction if you don’t entertain, but you could also be attracting the eye of the IRS if you deduct the wrong expenses. That is why you should take special care about the amount and which receipts you use for your small business entertainment deduction.

Meals

The IRS allows meals to be expended if they serve a business purpose. For instance, if you take a client out to lunch and discuss points of a contract, the meal counts as an entertainment expense. But what if you and the client discussed the contract in your office then went out to lunch? That’s acceptable as well. You can still qualify the meal as an entertainment discussion since there was direct business occurring directly before or afterward.

Other Entertainment

Can you take a client out on the golf course? Of course. Although the cost of the greens fees is allowed as an entertainment expense, the full price of your country club dues is not. The same holds true with sporting events. Your season subscription is off limits, but you can take a client out to a game, as long as business is discussed during, before, or after the event.

How Much Can You Deduct?

Keep in mind that your entertainment expenses are only 50% deductible. For your $500 meal, only $250 will be eligible as a small business tax deduction, and the same goes with other entertainment receipts.

Many small business owners ask about including other staff employees, spouses, and even spouses of the client. Employees are absolutely eligible to be included with the entertainment deduction, as long as they are associated with the business at hand with the client. Your friends or spouses are not eligible to be included with the total receipts. Spouses of the client are treated the same.

But what if you sponsor a large banquet where you, your staff, staff spouses, and clients and their spouses engage in a big meal? This might be an acceptable situation, but you should always check with a tax professional for full rules on this type of situation.

Entertainment is expected in business transactions. Be sure you get the full tax deduction coming to you, but avoid the temptation to deduct more than you are eligible.

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