Business Entertainment Expenses

Entertainment expenses that are both ordinary and necessary in carrying on a trade or business may be deductible if they meet one of the 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. For further information on record keeping, refer to Tax Topic 305.

Generally, only 50% of food and beverage ("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 are an employee whose deductible business entertainment expenses are fully sustained and reimbursed under an accountable plan, the reimbursement should not be included in your wages on Form W-2 and you should not deduct the expenses. If you are not reimbursed fully under an accountable plan, your expenses exceed the reimbursement you received under an accountable plan, or you are not reimbursed at all, use Form 2106, or Form 2106-EZ to report business entertainment expenses. These expenses, including expenses that exceed the reimbursement under an accountable plan, are carried over to Form 1040, Schedule A, and are generally subject to the 2% of adjusted gross income limit. Refer to Tax Topic 508 for more information on the 2% limit, Tax Topic 305 for more information on record keeping requirements, and Publication 463 for a definition of accountable and nonaccountable plans.

If you are self-employed, use Form 1040 (Schedule C), or Form 1040 (Schedule C-EZ), or if you are a farmer, use Form 1040 (Schedule F) to deduct these expenses.

For more information on deductible and nondeductible meal or entertainment expenses, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.