You can have a good time and still deduct part of the cost when you entertain business clients or customers.
The tax law generally permits you to deduct 50 percent of the cost of meals and entertainment that are either “directly related to” your business or “associated with” your business. For example, if you conduct business in your conference room while you serve lunch, the meal qualifies as entertainment that is directly related to your business. A more common situation is deducting entertainment that is associated with your business. To meet this tax test, you must hold a substantial and bona fide business discussion preceding or following the entertainment.
So, if you wrap up a business deal at 5 p.m. and then take the clients out to dinner, the cost is deductible within the allowable limits.
Keep in mind that you do not have to show that income or other business benefits actually resulted from an entertainment expense.
Here are few other guidelines:
- Host a party at your house. You can deduct the cost of hosting customers or business associates at your home before or after a business meeting. You can invite non-business guests as well, but you can only write off the expenses attributed to business guests.
For example, let’s say you entertain a group that includes yourself, four customers and six friends you know socially. Only 5/11th of the amount you spend qualifies as a deductible entertainment expense.
- Bring spouses along. If your business guest brings a spouse, you can bring yours and the cost of entertaining the group is still deductible — provided the primary purpose of the meal is business-related.
- Keep careful records. To substantiate your deductions, maintain records of the cost, time, description, business purpose and the business relationship of the people you entertain. In the event of an audit, the IRS takes a hard look at entertainment expenses to ensure they aren’t personal in nature and good records are your best defense.