Topic Number: 512 - Business Entertainment Expenses
You may deduct entertainment expenses that are both ordinary and necessary in carrying on your trade or business if they meet one of these two tests:
- The directly-related test, or
- The associated test
See Publication 463, Travel, Entertainment, Gift, and Car Expenses, for more detailed information about these two tests.
You must have records to prove the business purpose (under the applicable test) and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained.
Generally, only 50% of business-related meal and entertainment expenses are allowed as a deduction. For exceptions to the 50% limitation, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.
If you're an employee whose deductible business entertainment expenses are fully substantiated and reimbursed under an accountable plan, your employer shouldn't include the reimbursement in your wages on Form W-2 (PDF), Wage and Tax Statement, and you shouldn't deduct the expenses. If your expenses exceed the reimbursement you received under an accountable plan, if you received reimbursement under a nonaccountable plan, or if you didn't receive reimbursement at all, you can use Form 2106 (PDF), Employee Business Expenses, or Form 2106-EZ (PDF), Unreimbursed Employee Business Expenses, to deduct employee business entertainment expenses that otherwise qualify as deductible expenses. Carry these expenses over to Form 1040, Schedule A (PDF), Itemized Deductions, where they're generally subject to the 2% of adjusted gross income limit. Refer toPublication 529 and Form 1040, Schedule A (PDF) for more information on the 2% limit, and Publication 463 for a definition of accountable and nonaccountable plans.
If you're self-employed, use Form 1040, Schedule C (PDF), Profit or Loss From Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit From Business (Sole Proprietorship), or if you're a farmer, use Form 1040, Schedule F (PDF), Profit or Loss From Farming, to deduct these expenses.
For more information on deductible and nondeductible meal and entertainment expenses, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.