According to IRS Publication 463, entertainment generally isn’t deductible as a business expense. Starting with the 2017 Tax Cuts and Jobs Act, that category of business expense deductions is no longer allowed. So if you take a customer to a baseball game, even if you discuss business the whole time – the cost of the tickets isn’t deductible from your business or self-employed taxes.
This is bad news for the many of us who take clients to games, concerts, and on trips Membership dues and club fees also aren’t deductible. All of these expenses, formerly deductible, are now entirely excluded.
What if that’s my whole business?
But wait, you say – I’m in sales. My entire business is entertaining clients so I can sell them things. What then?
Entertainment is defined by the IRS as “any activity generally considered to provide entertainment, amusement, or recreation.” But while an event may be fun, it’s not necessarily entertainment if it’s an activity that’s typical of your industry for a specific business purpose. The IRS gives the following example:
Your kind of business may determine if a particular activity is considered entertainment. For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally isn’t considered entertainment. This is because fashion shows are typical in your business. But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show is generally considered entertainment.
So if you are a direct seller and the typical method of sales is through a party format, then the cost of hosting a party is a tax deductible expense. That’s because the party isn’t to provide some recreation, it’s your main method of selling. The same is true of a demonstration event where you host a cooking demonstration to showcase a new pot or appliance, for the purpose of selling those items.
If you’re a party planner and you sell party services, then the cost of the party is the business you’re in – that’s not entertainment either. If you’re a basketball scout and you go to games to see talent, then that’s likely not entertainment (assuming you’re scouting talent for your scouting business, not just reminding yourself how LeBron James plays).
But even if you’re in sales, if you’re taking someone to a club to chat business, that’s different from taking someone to an educational seminar on your product or a trade show. That’s probably entertainment, and not deductible — even if it’s common practice.
What about “standard” entertainment?
So what about costs that everyone incurs? Doesn’t it seem a little grinchy that you can’t deduct the employee holiday party? Fortunately you still can – if the entertainment is for all of your employees or contractors, and doesn’t favor highly compensated employees, then you can still deduct these types of customary expenses, as long as they are not “lavish.” Don’t buy everyone a yacht cruise with caviar and champagne, and you’ll be in the clear to deduct that.
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