You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee.
You can deduct entertainment expenses only if they are both ordinary and necessary (defined earlier in the Introduction
) and meet one of the following tests.
- Directly-related test.
- Associated test.
Both of these tests are explained in chapter 2 of Publication 463.
The amount you can deduct for entertainment expenses may be limited. Generally, you can deduct only 50% of your unreimbursed entertainment expenses. This limit is discussed next.
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 a higher percentage. See Individuals subject to "hours of service" limits,
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 26-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.
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.
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 in this section.
The 50% limit also applies to certain meal and entertainment expenses that are not business-related. It applies to meal and entertainment expenses incurred for the production of income, including rental or royalty income. It also applies to the cost of meals included in deductible educational expenses. taxmap/pub17/p17-145.htm#en_us_publink100034395
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 chapter. taxmap/pub17/p17-145.htm#en_us_publink100034396
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). taxmap/pub17/p17-145.htm#en_us_publink100034397
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). taxmap/pub17/p17-145.htm#en_us_publink100034398
Generally, business-related meal and entertainment expenses are subject to the 50% limit. Figure 26-A can help you determine if the 50% limit applies to you.
Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. taxmap/pub17/p17-145.htm#en_us_publink100034399
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 later under Reimbursements.
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% for 2008.
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.
There are also exceptions for the self-employed, advertising expenses, selling meals or entertainment, and charitable sports events. These are discussed in Publication 463. taxmap/pub17/p17-145.htm#en_us_publink100034403
This section explains different types of entertainment expenses that you my be able to deduct.taxmap/pub17/p17-145.htm#en_us_publink100034404
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.taxmap/pub17/p17-145.htm#en_us_publink100034405
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.
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.taxmap/pub17/p17-145.htm#en_us_publink100034408
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. taxmap/pub17/p17-145.htm#en_us_publink100034409
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. taxmap/pub17/p17-145.htm#en_us_publink100034410
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. taxmap/pub17/p17-145.htm#en_us_publink100034411
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. taxmap/pub17/p17-145.htm#en_us_publink100034412
This section explains different types of entertainment expenses that you generally may not be able to deduct.taxmap/pub17/p17-145.htm#en_us_publink100034413
You cannot deduct dues (including initiation fees) for membership in any club organized for:
- 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.
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:
- Country clubs,
- Golf and athletic clubs,
- Airline clubs,
- Hotel clubs, and
- Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions.
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. taxmap/pub17/p17-145.htm#en_us_publink100034415
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 discussed earlier. taxmap/pub17/p17-145.htm#en_us_publink100034416
For more information on entertainment expenses, including discussions of the directly-related and associated tests, see chapter 2 of Publication 463.