Understanding Entertainment Expenses

The general rule-of-thumb for small businesses is that you are able to deduct ordinary and necessary expenses to entertain a client, customer or employee if the expenses meet the directly –related or associated test. We have outlined both tests and further definitions for you.

Definitions	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/business, & Entertainment is directly before or after a substantial business discussion.
Other Rules	You cannot deduct expenses that are lavish or extravagant under the circumstances. You generally can deduct only 50% of your entertainment expenses.

Exceptions to the 50% Limit
Generally, business-related meals and entertainment are subject to the 50% limit – employers or their employees can deduct 50% of expenses.  However, one exception that is often overlooked is an employee benefit considered a de minimis fringe benefit as outlined in the next column.

De minimis fringe benefits include:
•    Occasional cocktail parties, group meals or picnics for employees or their guests;
•    Traditional birthday or holiday gifts of property with a low fair market value;
•    Occasional theater or sporting event tickets;
•    Coffee, doughnuts and soft drinks;
•    Flowers, fruit, books or similar property provided to employees under special circumstances.

De minimis fringe benefits do not include:
•    Season tickets to sporting or theatrical events;
•    Membership in a private country club or athletic facility; or
•    The use of employer-owned or leased facilities for a weekend.

For more questions on entertainment expenses, please contact us.