Entertainment expenses are 50 percent deductible if they have
a business purpose. That is, as long as you have a reasonable
expectation of reaping specific business-related benefits,
you may entertain guests at social or athletic clubs,
theaters, sporting events, fishing or hunting trips, etc.
If you follow the rules, half of the expenses will be deductible.
Business meals. Restaurant meals are treated the same as
business entertaining so your deductions are limited to 50
percent of the cost. Therefore, when you treat co-workers
or professional associates, try to spend some time talking
business during the meal. You probably will be able to deduct
50 percent of the cost.
Non-business settings. Unfortunately, the IRS considers that
entertaining in certain places is not conducive to doing
business. This might include nightclubs, theaters, sporting
events, casinos, cocktail parties, etc.
Say you take a business associate to a professional basketball
game. The IRS might say the atmosphere was too noisy and
hectic to carry on any meaningful business discussions.
To overcome this hurdle, make sure that you comply with the
“associated” test. Under this rule, you can deduct expenses
for entertainment that takes place before or after a business
discussion.
You spend an hour with an associate, having an intensive
business discussion. Then you take him to a sports event.
A legitimate deduction could be claimed for half the expenses
incurred–tickets, parking, refreshments, etc.–as long as you
both attend the game.
Play now, work later. Entertainment doesn’t have to take place
on the same day as a business discussion in order to be
deductible, as long as you can show why it wasn’t done that
day. You might, for example, entertain out-of-town visitors
the evening they arrive and have a business meeting the next day.
Party time. Other types of entertaining may be deductible, too.
Suppose you throw a Christmas party each year. Your expenses
might be 50 percent deductible if you can demonstrate that
your party had a purpose of obtaining or maintaining business.
If you invite some of your friends and family to the party,
you can deduct only the costs that pertain to your business
guests.
Spouse rules. What if your spouse (or any companion)
accompanies you while you’re entertaining? You may find it
difficult to entertain a business associate without your
spouse, especially if a business associate from out of town
is traveling with a spouse. Thus, if you take a business
guest out to dinner, with spouses, your expenses normally will
be 50 percent deductible.
