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.
- Directly-related test.
- Associated test.
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.
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 later under 50% Limit
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. |
- 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 precedes or follows 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.
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.
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.