Tax Tips
July 2003
Making Sure Entertainment Expenses Yield Deductions
Many businesses consider the occasional wining and dining of customers and clients just to stay in touch with them to be a necessary cost of doing business. The same goes for taking business associates or even employees out to lunch once in a while after an especially tough assignment has been completed successfully. It's easy to think of these entertainment costs as deductible business expenses, but they're not. As a general rule, a company can deduct meals and entertainment as a business expense only if one of two specific conditions are met. What's more, the deduction for either type of expense generally is limited to 50 percent of the cost.
Entertainment that is directly connected to business. To be considered directly connected to business, the meal or entertainment event must meet three conditions:
* It must have been scheduled with more than a general
expectation of deriving future income or a specific business
benefit from the event. In other words, a meal or dinner
date arranged for general goodwill purposes does not qualify.
* A business meeting, negotiation, or transaction must actually
occur during the meal or entertainment. In other words,
business actually must be discussed.
* The main character of the event, considering the facts
and circumstances, is the active conduct of your company's
trade or business.
For example, an executive employee who treats a client to a golf game in order to discuss the general parameters of a business deal in an informal atmosphere is engaged in entertainment that is directly connected to business. So is a manager who discusses sensitive business plans with a subordinate over lunch at an off-premises restaurant.
Entertainment that is associated with business. To be considered "associated with business," a meal or entertainment event need only directly precede or follow a substantial and bona fide business discussion. For example, if a salesperson inks a major contract and then treats the client to dinner and a show, 50 percent of the cost is deductible as business entertainment.
Even if a meal or entertainment expense qualifies as a business expense, none of the cost is deductible unless strict and detailed substantiation and recordkeeping requirements are met to the letter.
If you have any questions as to how these rules apply to
your particular situation, please do not hesitate to call
WJH at 512-343-8075.
