BUSINESS ENTERTAINMENT DEDUCTIONS

Whether business is booming or not, the pace of work usually seems to slow down a bit during the summer months. For some, it may be easier to get away from the office to play golf, shop for a trip or take in a game. The summer might also be a good time to “mix business with pleasure” by entertaining business clients, customers or associates.

By planning things carefully and following a few simple rules, you may be able to deduct 50% of business entertainment expenses.

The key is to show that the entertainment expenses are related to your business. To qualify, the entertainment either must be “directly related” to the business or “associated with” the business.

• Directly related expenses

Entertainment is directly related to business if you expect to derive a specific business benefit from it and actually engage in business during the entertainment. This is a difficult test to meet if the entertainment consists of a show or sporting event. However, it might be possible to qualify if you iron out the terms of a contract over a round of golf.

Another expense that may be directly related is the cost of a hospitality suite at a trade show where business is conducted.

• Associated with expenses

Entertainment is associated with your business if it directly follows or comes before a substantial bona fide business discussion. This requires some further explanation. The simplest method is to look at a couple of examples.

Example 1: Say you have spent a couple of hours meeting some valued business clients about customizing products for their use. After the discussion, you take them out for dinner, drinks and a show.

Result: You may deduct 50% of the meal and entertainment expenses because they are “associated with” business. However, they cannot be lavish or extravagant under the circumstances.

• Entertainment and business discussion

Generally, the entertainment must take place on the same day as the business discussion. However, if you are entertaining business guests from out of town, it may take place on the previous or following day.

Example 2: A supplier flies into town on Wednesday night for contract talks scheduled to take place at your business Thursday morning. You meet him at the airport and take him to a game before dropping him off at the hotel.

Result: The entertainment is associated with your business, although it occurs on the day before the business meeting.

• Inclusion of spouses

Suppose a client or customer brings his or her spouse along on the trip. You may decide to include your spouse in the entertainment to make it a foursome. You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. However, you can deduct these costs if you can show that you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment.

Example: You entertain a customer. The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. The customer’s spouse joins you because it is impractical to entertain the customer without the spouse. You can deduct the cost of entertaining the customer’s spouse. If your spouse joins the party because the customer’s spouse is present, the cost of the entertainment for your spouse is also deductible.

Note: Although meal and entertainment expenses by themselves are only 50% deductible, certain other business related expenses may be 100% deductible. These include cab fares, parking, tolls and auto expenses incurred in the course of the entertainment.

• Company payment of entertainment

What if your company picks up the tab for entertainment expenses? Assuming that expenses are properly accounted for, you may have no tax consequences. The company generally may deduct 50% of the qualified expenses.

Last but not least: When entertaining clients or customers, maintaining accurate records is a necessity. For instance, always keep receipts for expenses of $25 or more.

RECORD KEEPING

It is best to keep a diary with entries for the name of the person entertained, amount spent, time and location of the entertainment, business relationship and business purpose of the entertainment. Also, note whether there was a business meeting before or after the entertainment. If business develops, some notes would be appropriate. If business does not develop, it may be even more important to have notes as to why there were no subsequent revenues to you or the company.

Sources: Tax Facts 2003, National Underwriter Company
www.irs.gov