1. Get down to business
Any entertaining must be directly related to the active conduct of your business. So be sure to talk about your firm and how your client/guest fits into the picture. And don’t worry. You don’t have to talk through the theater performance. The IRS says that as long as the business discussion directly precedes or follows the meal or entertainment, you’re good.
2. Don’t get outrageous
Sure, a wild night on the town might impress new clients, but not necessarily the IRS. The tax agency says that the entertaining environment still must be conducive to conducting business.
And let me share something I’ve learned as I’ve matured. You generally can have more coherent discussions, business and otherwise, if you don’t over indulgence in alcoholic beverages.
3. Know what fits your business
Every business owner believes that their company is special. For tax deduction purposes, it truly might be. Your kind of business could determine if a particular activity is considered entertainment. If you are a dress designer, for example, a fashion show to introduce your new designs to store buyers generally is not considered entertainment. Fashion shows are typical in your business. But 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
The differentiation between entertainment and simply the usual course of doing business is important because not every entertainment penny spent is deductible. Generally, only 50 percent of meal (food and beverage) and entertainment expenses are deductible.
5. Document, document, document
Internal Revenue Code section 274(a)(1) states that no deduction is allowed for expenses associated with “entertainment, amusement or recreation” unless you can show that the expenditure was directly related to a bona fide business discussion, business meeting or business convention.
So save those receipts and annotate them to show the business purpose of the meal or night out.
IRS Publication 463 has more on deductible meal and entertainment expenses. Check it out, then you and your clients enjoy your IRS-approved deductible business outings.