Are Company Holiday Parties Tax Deductible?

Company holiday parties are a common tradition, providing an opportunity for employers to show appreciation to their staff. Businesses often consider these events as expenses incurred in their operations. Understanding the tax implications of such gatherings is important for businesses navigating their financial obligations. The deductibility of these expenses depends on various factors, including the nature of the event, the attendees, and the costs involved. This article explores the tax treatment of company holiday parties, offering clarity on what can be deducted and under what conditions.

General Rules for Business Expense Deductions

For an expense to be deductible, it must generally be considered “ordinary and necessary” in carrying on a trade or business. An ordinary expense is one that is common and accepted in a particular business, while a necessary expense is one that is helpful and appropriate for the business. This foundational principle, outlined in Internal Revenue Code Section 162, applies broadly to all business deductions.

Significant changes to meal and entertainment expense deductibility occurred with the Tax Cuts and Jobs Act (TCJA) of 2017. Prior to the TCJA, businesses could generally deduct 50% of both meal and entertainment expenses. However, the TCJA eliminated the deduction for entertainment expenses entirely; these costs are no longer deductible unless specific exceptions apply. Despite this change, the TCJA did not eliminate the deduction for business meals, which generally remain 50% deductible if they are not lavish or extravagant and the taxpayer or an employee is present.

Deductibility of Holiday Party Expenses

Company holiday parties can qualify for tax deductions, primarily because they are viewed as recreational, social, or similar activities for employees. Expenses for these types of activities are an exception to the general disallowance of entertainment expenses under Internal Revenue Code Section 274. Costs associated with the event itself, such as venue rental and decorations, can be 100% deductible if the party is primarily for the benefit of employees.

This implies that all employees should be invited, making the event inclusive and demonstrating a broad business purpose for employee morale and team building. If the party is primarily for the benefit of employees and their families, the expenses for the activity itself are fully deductible.

Food and beverage expenses at employee-focused holiday parties are subject to different rules. While the overall event can be 100% deductible, the food and beverages provided are subject to the 50% deductibility rule under Internal Revenue Code Section 274. This 50% limitation applies if the expenses are not lavish or extravagant and the taxpayer or an employee is present. For instance, the cost of catering, drinks, and related service charges for employee meals at the party would be 50% deductible.

Non-Deductible Holiday Party Expenses

While many holiday party expenses can be deducted, certain costs are not deductible. Expenses considered lavish or extravagant are never deductible, regardless of their purpose. The Internal Revenue Service does not provide a specific dollar limit for “lavish or extravagant,” but implies the expense should be reasonable under the circumstances.

Entertainment expenses are no longer deductible after the TCJA. If the holiday party involves entertainment for clients or customers, those specific entertainment costs are non-deductible. For example, tickets to a sporting event or a show, if provided to clients, would not be deductible.

Expenses for non-employees, such as clients or customers, attending a holiday party face limitations. While the party itself is 100% deductible for employees, costs directly attributable to non-employees are only 50% deductible if they meet the criteria for a business meal, or entirely non-deductible if considered entertainment.

Record Keeping for Holiday Party Deductions

Maintaining accurate records is important to substantiate any business expense deduction, including for company holiday parties. The Internal Revenue Service advises keeping tax records for at least three years from the date a return was filed. This timeframe aligns with the statute of limitations for potential audits.

Documentation includes receipts and invoices for all expenses, such as venue rental, catering, and decorations. Record the date and location of the event. Businesses should record the number of attendees, distinguishing between employees and non-employees, to support deduction percentages.

The event’s purpose should be documented, highlighting how it benefits the business, such as fostering employee morale or team building. This helps establish the “ordinary and necessary” nature of the expense. These records ensure a business can support its claims if questions arise during an audit.