Many business owners think that anytime they entertain a client, be it at a sporting event, dinner, or a round of golf, that that expense is fully deductible. And while there are situations where those expenses can be deducted, there are certain requirements to meet in order for the cost to qualify for the deduction.
Business – This should go without saying, but business must be done for a deduction to count. If you take a client to a baseball game with every intention of selling a new product, but it never comes up, and instead you talk sports and family the whole time, then that is not deductible. But by discussing a client’s relationship, a new product, a contract, or something along those lines, you have met this requirement.
Attendees – Depending upon who is at the event, there may be a limit to how much of the expense is deductible. If, for instance, you host a party for clients and prospects, you may be limited to only writing off 50% of the cost. If employees are there, however, that can change to a 100% deduction. Be sure to understand how structuring the guest list will impact the tax allowance and plan accordingly.
Reasonable – The IRS can (and will) question entertainment that is “lavish or extravagant.” While there is no preset definition of this, you need to be able to justify the expensive relative to your business sales and the potential opportunity for the meeting. If you are running a net loss annually and the client you take out only generates a small amount of revenue, it might be difficult to explain spending several thousand dollars on dinner and tickets to a show. Be reasonable in your entertainment and you will have no issues.
Track Expenses – Keep a journal of all of the expenses, and how much can be deducted. This will make it easier at tax time than trying to go through all of your receipts. Within the journal, keep a log of who attended, what was discussed, and what the purpose was.
Keep Receipts – If you are audited, a copy of your credit card statement is not going to cut it to justify these write-offs. Instead, the IRS is going to want to see itemized receipts proving what was purchased. Keeping the receipts will be the only way to truly justify your expenses.
Prove Business Intent – When hosting events with multiple clients, employees, or the community at large, be sure that you can prove business intent. This can be done by collecting contact information for future follow up, handing out business cards after doing a quick presentation, or even by opening yourself up to a Q&A. During the event, try to get pictures and a log of attendees, to remove all doubt in an audit.
Ultimately, the decision if something is tax deductible should be determined by a tax professional, and any questions answered by your CPA. But if you follow these guidelines and tips, you should be in the clear in the event of an audit.