You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee.
The rules and definitions are summarized in Table 2-1.
You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests.
Both of these tests are explained later.
An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful
and appropriate for your business. An expense does not have to be required to be considered necessary.
To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that:
-
The main purpose of the combined business and entertainment was the active conduct of business,
-
You did engage in business with the person during the entertainment period, and
-
You had more than a general expectation of getting income or some other specific business benefit at some future time.
Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing
trips, or on yachts or other pleasure boats. Even if you show that business was the main purpose, you generally cannot deduct
the expenses for the use of an entertainment facility. See
Entertainment facilities
under What Entertainment Expenses Are Not Deductible? later in this chapter.
You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during
the entertainment. It is not necessary to devote more time to business than to entertainment. However, if the business discussion
is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test.
Table 2-1. When Are Entertainment Expenses Deductible?
| General rule |
You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related
test or the associated test.
|
| Definitions |
-
Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes
meals provided to a customer or client.
-
An ordinary expense is one that is common and accepted in your trade or business.
-
A necessary expense is one that is helpful and appropriate.
|
| Tests to be met |
Directly-related test
-
Entertainment took place in a clear business setting, or
-
Main purpose of entertainment was the active conduct of business, and
You did engage in business with the person during the entertainment period, and
You had more than a general expectation of getting income or some other specific business benefit.
|
| |
Associated test
-
Entertainment is associated with your trade or business, and
-
Entertainment directly before or after a substantial business discussion.
|
| Other rules |
-
You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense.
-
You cannot deduct expenses that are lavish or extravagant under the circumstances.
-
You generally can deduct only 50% of your unreimbursed entertainment expenses (see
50% Limit
).
|
You do not have to show that business income or other business benefit actually resulted from each entertainment expense.
Clear business setting.
If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered
directly related to your business or work. The following situations are examples of entertainment in a clear business setting.
-
Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of
business products.
-
Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional
free meal to a loyal customer).
-
Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship
between you and the persons entertained. An example is entertainment of business and civic leaders at the opening of a new
hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons
entertained.
Expenses not considered directly related.
Entertainment expenses generally are not considered directly related if you are not there or in situations where there
are substantial distractions that generally prevent you from actively conducting business. The following are examples of situations
where there are substantial distractions.
-
A meeting or discussion at a nightclub, theater, or sporting event.
-
A meeting or discussion during what is essentially a social gathering, such as a cocktail party.
-
A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs,
golf clubs, athletic clubs, or vacation resorts.
Even if your expenses do not meet the directly-related test, they may meet the associated test.
To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment
is:
-
Associated with the active conduct of your trade or business, and
-
Directly before or after a substantial business discussion (defined later).
Associated with trade or business.
Generally, an expense is associated with the active conduct of your trade or business if you can show that you had
a clear business purpose for having the expense. The purpose may be to get new business or to encourage the continuation of
an existing business relationship.
Substantial business discussion.
Whether a business discussion is substantial depends on the facts of each case. A business discussion will not be
considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business
transaction to get income or some other specific business benefit.
The meeting does not have to be for any specified length of time, but you must show that the business discussion was
substantial in relation to the meal or entertainment. It is not necessary that you devote more time to business than to entertainment.
You do not have to discuss business during the meal or entertainment.
Meetings at conventions.
You are considered to have a substantial business discussion if you attend meetings at a convention or similar event,
or at a trade or business meeting sponsored and conducted by a business or professional organization. However, your reason
for attending the convention or meeting must be to further your trade or business. The organization that sponsors the convention
or meeting must schedule a program of business activities that is the main activity of the convention or meeting.
Directly before or after business discussion.
If the entertainment is held on the same day as the business discussion, it is considered to be held directly before
or after the business discussion.
If the entertainment and the business discussion are not held on the same day, you must consider the facts of each
case to see if the associated test is met. Among the facts to consider are the place, date, and duration of the business discussion.
If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the
reasons the entertainment and the discussion did not take place on the same day.
Example.
A group of business associates comes from out of town to your place of business to hold a substantial business discussion.
If you entertain those business guests on the evening before the business discussion, or on the evening of the day following
the business discussion, the entertainment generally is considered to be held directly before or after the discussion. The
expense meets the associated test.
In general, you can deduct only 50% of your business-related meal and entertainment expenses. (If you are subject to the Department
of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. See
Individuals subject to “hours of service” limits
, later.)
The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or
their clients, depending on whether the expenses are reimbursed.
Figure A
summarizes the general rules explained in this section.
The 50% limit applies to business meals or entertainment expenses you have while:
-
Traveling away from home (whether eating alone or with others) on business,
-
Entertaining customers at your place of business, a restaurant, or other location, or
-
Attending a business convention or reception, business meeting, or business luncheon at a club.
Included expenses.
Expenses subject to the 50% limit include:
-
Taxes and tips relating to a business meal or entertainment activity,
-
Cover charges for admission to a nightclub,
-
Rent paid for a room in which you hold a dinner or cocktail party, and
-
Amounts paid for parking at a sports arena.
However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject
to the 50% limit.
Application of 50% limit.
The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered
by one of the exceptions discussed later.
The 50% limit also applies to certain meal and entertainment expenses that are not business related. It applies to
meal and entertainment expenses you have for the production of income, including rental or royalty income. It also applies
to the cost of meals included in deductible educational expenses.
When to apply the 50% limit.
You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. You first have
to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this
publication.
Example 1.
You spend $200 for a business-related meal. If $110 of that amount is not allowable because it is lavish and extravagant,
the remaining $90 is subject to the 50% limit. Your deduction cannot be more than $45 (50% × $90).
Example 2.
You purchase two tickets to a concert and give them to a client. You purchased the tickets through a ticket agent. You paid
$200 for the two tickets, which had a face value of $80 each ($160 total). Your deduction cannot be more than $80 (50% × $160).
Exceptions to the 50% Limit
Generally, business-related meal and entertainment expenses are subject to the 50% limit.
Figure A
can help you determine if the 50% limit applies to you.
Expenses not subject to 50% limit.
Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions.
1 - Employee's reimbursed expenses.
If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under
an accountable plan.
Accountable plans
are discussed in chapter 6.
2 - Self-employed.
If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all
of the following requirements are met.
-
You have these expenses as an independent contractor.
-
Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform.
-
You provide adequate records of these expenses to your customer or client. (See chapter 5.)
In this case, your client or customer is subject to the 50% limit on the expenses.
Example.
You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you
for these expenses. You are not subject to the directly-related or associated test, nor are you subject to the 50% limit.
If the client can deduct the expenses, the client is subject to the 50% limit.
If you (the contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately
account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated
test and to the 50% limit.
3 - Advertising expenses.
You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general
public as a means of advertising or promoting goodwill in the community. For example, neither the expense of sponsoring a
television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50%
limit.
4 - Sale of meals or entertainment.
You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities
to the public. For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such
as a floor show, is not subject to the 50% limit.
5 - Charitable sports event.
You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable
sports event. For the conditions the sports event must meet, see
Exception for events that benefit charitable organizations
under
What Entertainment Expenses Are Deductible?, later.
Individuals subject to “hours of service” limits.
You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take
place during or incident to any period subject to the Department of Transportation's “
hours of service” limits. The percentage is 80%.
Individuals subject to the Department of Transportation's “
hours of service” limits include the following persons.
-
Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under
Federal Aviation Administration regulations.
-
Interstate truck operators and bus drivers who are under Department of Transportation regulations.
-
Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who
are under Federal Railroad Administration regulations.
-
Certain merchant mariners who are under Coast Guard regulations.
What Entertainment Expenses Are Deductible?
This section explains different types of entertainment expenses that you may be able to deduct.
Entertainment.
Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Examples
include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts;
or on hunting, fishing, vacation, and similar trips.
Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals,
a hotel suite, or a car to customers or their families.
A meal as a form of entertainment.
Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other
entertainment or by itself. A meal expense includes the cost of food, beverages, taxes, and tips for the meal. To deduct an
entertainment-related meal, you or your employee must be present when the food or beverages are provided.
You cannot claim the cost of your meal both as an entertainment expense and as a travel expense.
Meals sold in the normal course of your business are not considered entertainment.
Deduction may depend on your type of business.
Your kind of business may determine if a particular activity is considered entertainment. For example, if you are
a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally is not considered
entertainment. This is because fashion shows are typical in your business. But, if you are an appliance distributor and hold
a fashion show for the spouses of your retailers, the show generally is considered entertainment.
Separating costs.
If you have one expense that includes the costs of entertainment, and other services (such as lodging or transportation),
you must allocate that expense between the cost of entertainment and the cost of other services. You must have a reasonable
basis for making this allocation. For example, you must allocate your expenses if a hotel includes entertainment in its lounge
on the same bill with your room charge.
Taking turns paying for meals or entertainment.
If a group of business acquaintances take turns picking up each others' meal or entertainment checks without regard
to whether any business purposes are served, no member of the group can deduct any part of the expense.
Lavish or extravagant expenses.
You cannot deduct expenses for entertainment that are lavish or extravagant. An expense is not considered lavish or
extravagant if it is reasonable considering the facts and circumstances. Expenses will not be disallowed just because they
are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts.
Allocating between business and nonbusiness.
If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses
between business and nonbusiness. You can deduct only the business part. If you cannot establish the part of the expense for
each person participating, allocate the expense to each participant on a pro rata basis.
Example.
You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. Only 4/11 of the expense qualifies as a business entertainment expense. You cannot deduct the expenses for the seven social guests
because those costs are nonbusiness expenses.
Trade association meetings.
You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or
conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business.
These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional
associations.
Entertainment tickets.
Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price.
For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the
tickets you pay to scalpers.
Exception for events that benefit charitable organizations.
Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. You can take
into account the full cost you pay for the ticket, even if it is more than the face value, if all of the following conditions
apply.
-
The event's main purpose is to benefit a qualified charitable organization.
-
The entire net proceeds go to the charity.
-
The event uses volunteers to perform substantially all the event's work.
The 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to such a charitable
sports event.
Example 1.
You purchase tickets to a golf tournament organized by the local volunteer fire company. All net proceeds will be used to
buy new fire equipment. The volunteers will run the tournament. You can deduct the entire cost of the tickets as a business
expense if they otherwise qualify as an entertainment expense.
Example 2.
You purchase tickets to a college football game through a ticket broker. After having a business discussion, you take a client
to the game. Net proceeds from the game go to colleges that qualify as charitable organizations. However, since the colleges
also pay individuals to perform services, such as coaching and recruiting, you can only use the face value of the tickets
in determining your business deduction.
Skyboxes and other private luxury boxes.
If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot
deduct more than the price of a nonluxury box seat ticket.
To determine whether a skybox has been rented for more than one event, count each game or other performance as one
event. For example, renting a skybox for a series of playoff games is considered renting it for more than one event. All skyboxes
you rent in the same arena, along with any rentals by related parties, are considered in making this determination.
Related parties include:
-
Family members (spouses, ancestors, and lineal descendants),
-
Parties who have made a reciprocal arrangement involving the sharing of skyboxes,
-
Related corporations,
-
A partnership and its principal partners, and
-
A corporation and a partnership with common ownership.
Example.
You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. The cost of regular nonluxury box seats
at each event is $30 a seat. You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events).
Food and beverages in skybox seats.
If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts
allowable for the skybox, subject to the requirements and limits that apply. The amounts separately stated for food and beverages
must be reasonable. You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals.
What Entertainment Expenses Are Not Deductible?
This section explains different types of entertainment expenses that you generally may not be able to deduct.
Club dues and membership fees.
You cannot deduct dues (including initiation fees) for membership in any club organized for:
-
Business,
-
Pleasure,
-
Recreation, or
-
Other social purpose.
This rule applies to any membership organization if one of its principal purposes is either:
-
To conduct entertainment activities for members or their guests, or
-
To provide members or their guests with access to entertainment facilities, discussed later.
The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. You cannot
deduct dues paid to:
Entertainment facilities.
Generally, you cannot deduct any expense for the use of an entertainment facility. This includes expenses for depreciation
and operating costs such as rent, utilities, maintenance, and protection.
An entertainment facility is any property you own, rent, or use for entertainment. Examples include a yacht, hunting
lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation
resort.
Out-of-pocket expenses.
You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided
during entertainment at a facility. These are not expenses for the use of an entertainment facility. However, these expenses
are subject to the
directly-related and
associated tests and to the
50% limit, all discussed earlier.
Expenses for spouses.
You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. However, you
can deduct these costs if you can show that you had a clear business purpose, rather than a personal or social purpose, for
providing the entertainment.
Example.
You entertain a customer. The cost is an ordinary and necessary business expense and is allowed under the entertainment rules.
The customer's spouse joins you because it is impractical to entertain the customer without the spouse. You can deduct the
cost of entertaining the customer's spouse. If your spouse joins the party because the customer's spouse is present, the cost
of the entertainment for your spouse is also deductible.
Gift or entertainment.
Any item that might be considered either a gift or entertainment generally will be considered entertainment. However,
if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift.
If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the
performance or event, you have a choice. You can treat the tickets as either a gift or entertainment, whichever is to your
advantage.
You can change your treatment of the tickets at a later date by filing an amended return. Generally, an amended return
must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid,
whichever is later.
If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. You
cannot choose, in this case, to treat the tickets as a gift.
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