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: