How To Better Plan for A Business Entertainment Expense

christmas client party

When To Deduct 50% or 100% for Business Entertainment Expense?

Celebrating With Food, Employees and Clients

Last month, we celebrated the end of tax season by throwing a client appreciation party. Paragon, as the host, purchases all the food and drink for this event.  As a business owner, should this count as a 50% or 100% deduction? Some business owners assume they can only deduct the 50%. But, in fact, you could be giving up a lot of money by not knowing the rules.

Many small business owners get this type of business entertainment expense incorrect. Yes, there are certain rules about food and entertainment. Knowing them will allow you to deduct 100% of it as a business entertainment expense. By structuring events properly and meeting tax law requirements, you can celebrate and appreciate your clients with a 100% deduction. Business entertainment expenses apply to customer appreciation parties, client appreciation events, grand opening events, company holiday party, and company picnics.

Celebrating with Food and Your Employees

There are IRS rules that you must follow, including appropriate documentation to purchase food for your employees. In fact, this business entertainment expense can also be 100% deductible. For this to be an appropriate and legitimate expense, there’s usually a “give and take”. Employer buys food for everyone in the office and usually, the employees stay at their desk and “work through their required lunch hour break”. In exchange, the IRS allows the business owner to take this expense as 100% deduction. However, if everyone was to go out to a lunch at a restaurant to celebrate a new, profitable client, you would not meet the requirements to allow for a 100% business entertainment expense deduction. This applies even if all the individuals at the lunch table are employees of the company.

Remember, the IRS will not allow expenses that are not structured correctly. Nor do they accept expenses without appropriate backup documentation. Let our office help you get the full allowable benefits when celebrating victories with your employees.