Starting Your Business/Keeping Tax Records

What are Business Expenses

Entertainment

You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee.

To be deductible, the expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business, trade, or profession. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

In addition, the entertainment expense must meet one of two tests:

1. Directly-related test, or

2. Associated test.

Even if you meet all the requirements for claiming a deduction for entertainment expenses, the amount you can deduct may be limited. Generally, you can deduct only 50% of your unreimbursed entertainment expenses.

To meet the directly-related test, you must show that the main purpose of the combined business and entertainment was the active conduct of business, 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 at some future time.

To meet the associated test, you must show that the entertainment is associated with your trade or business, and directly precedes or follows a substantial business discussion.

Table 2 When are Entertainment Expenses Deductible?

 

Important References:

Publication 463       Travel, Entertainment, Gift, and Car Expenses