As a small business owner, you or your employees may entertain clients or customers. Although these expenses are often necessary to keep, retain and earn new business. There are many different activities that are often thought of as entertainment expenses, but what type of expenses qualify as meal and entertainment expenses?
What Is an Entertainment Expense?
Entertainment is any activity to provide amusement or recreation to a customer. Some examples include theater, nightclubs, sporting events, or even a vacation. In addition to the event itself, entertainment expenses can constitute meals, hotels, or a car throughout the duration of the event.
Are Entertainment Expenses Tax Deductible?
In recent years, many businesses have realized that entertainment expenses can qualify for tax deductions. There are two different types of deductible activities in the eyes of the IRS: Directly Related and Associated-With Tasks.
A Directly Related task is something that, without a question, relates back to your business. Whether you are hosting an event in a hotel’s conference center or attending an industry convention, using a clear business setting can help you to ensure that your business expenses are directly related to your business.
If a task is associated with business activities, it may still qualify for a tax deduction. Some examples of associated-with tasks include a meal or entertainment option that takes place directly after a business expense, or there was a clear purpose to the acquired expense.
What is Deductible? What is Not?
The following are some examples of some entertainment expenses that qualify for tax deductions.
- Meals in office during meetings of employees, stockholders, agents, or directors (50% deductible) 100% deductible in 2021 and 2022 if the meals are provided by a restaurant
- Meals during business travel (50% deductible) 100% deductible in 2021/22
- Meals at a seminar or conference (50% deductible) 100% deductible in 2021/22
- Meals included as taxable compensation to an employee or independent contractor (100% deductible)
- Meals sold to a client or customer (100% deductible)
- The food is offered to the public for free (100% deductible)
- Office holiday party or picnic (100% deductible)
- Client business meals (50% deductible if the taxpayer is present and not lavish or extravagant) 100% deductible in 2021/22
- Team-building events (100% deductible)
- Meals provided for the convenience of the employer (such as meals for occasional employee overtime) are 100% deductible in 2021 and 2022 if the meals are provided by a restaurant
- Water, coffee, and snacks at the office no change in 2021/22
- Meals included in charitable sports packages are 100% deductible in 2021/22
The following are some examples of expenses that would not be considered tax credit deductible.
- Sporting event tickets
- Transportation to/from a restaurant for client business meals
- Club memberships and club-related expenses
- Meals during entertainment that are not listed separately on the invoice
Bookkeeping Tips for Entertainment Expenses
To ensure that you are receiving the maximum entertainment deductions possible, take advantage of the following tips.
- Separate expenses that are strictly for entertainment purposes—if you don’t already have one, create a new account for these, and designate which are business meals. Travel expenses should be completely separate from entertainment, including meals while traveling. Travel expenses are 100% deductible, except for meals while traveling, which are 50% deductible in 2020 but 100% deductible in 2021/22.
- Create a separate category for employee social meals. These would include things like your holiday party, summer picnic, team building events, staff mentoring, etc. All of these are 100% deductible expenses.
Maintaining a budget for your business’s entertainment expenses will allow you to properly plan for the financial future of your business. With a streamlined analytical process, setting and obtaining your goals will become more manageable. Learning how to create tax-deductible business expenses is something that your business can and will benefit from.
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