5 Ways to Maximize Business Entertainment Deductions

June 22nd, 2014 at 9:38 AM

For business owners, entertaining clients is a time-honored tradition. However, you must be extremely careful, because it’s a sensitive area with the IRS.

Here’s 5 ways to maximize your business meal and entertainment deductions.

1. Get down to business. Any entertaining must be directly related to the active conduct of your business. So, be sure to talk about business related matters. And don’t worry, you don’t have to talk about business on the golf course, the IRS says that as long as the business discussion is 24 hours prior or after the meal or entertainment, you’re in the clear.
2. Don’t be extravagant. The entertaining environment must be conducive to conducting business—a wild night on the town may impress some clients, but not the IRS.
3. Know what fits your business. Your type of business could determine if a particular activity is considered entertainment. If you are a dress designer, a fashion show to introduce new designs to store buyers is generally not considered entertainment-because fashion shows are typical in your business. However, if you are an appliance distributor and hold a fashion show with well-appointed kitchens as the backdrop for your retailers, the apparel display generally is considered entertainment.
4. Note the limits. Not all meal and entertainment expenses are 100% deductible, generally they are limited to 50%. Therefore, the differentiation between entertainment and the usual course of doing business is important to know. There are ways that we advise our clients to make almost all these expenses 100% tax deductible.
5. Documentation is essential. Internal Revenue Code Section 274(a)(1) and 274(d) govern the importance of proper documentation in this area of the tax law. The business and meal entertainment deductions must meet a higher level of documentation to be allowable. I have a white paper discussing this very topic for my clients.

Business entertainment can be a valuable tax deduction for most business owners if done within the tax laws.