Are Your Employee Events Tax Deductible?
The tax treatment of employee social events is determined by their purpose and inclusivity. Learn the IRS guidelines for ensuring your expenses are fully deductible.
Planning company events requires careful consideration of your budget, and understanding the tax implications is a significant part of that process. While the Tax Cuts and Jobs Act (TCJA) eliminated the deduction for most business-related entertainment expenses, an exception remains for certain employee-focused events. Navigating the Internal Revenue Service (IRS) rules is necessary to determine if your company party qualifies for a full deduction. The TCJA provision eliminating most entertainment deductions is scheduled to expire at the end of 2025, which could change the rules for future years unless Congress acts.
The 100 Percent Deduction Exception
A provision in the tax code allows businesses to deduct 100 percent of the costs for recreational, social, or similar activities for employees. This rule is an exception to the general 50 percent limit on deductible business meals and the broader disallowance of entertainment expenses. The entire cost of qualifying events, including food, beverages, and facility rentals, can be written off.
The primary condition for this full deduction is that the event must be “primarily for the benefit of employees,” which means it cannot be structured to favor a select few. Specifically, the event cannot disproportionately benefit what the IRS terms “highly compensated employees” (HCEs).
An employee is considered an HCE based on two potential tests. Under the ownership test, anyone who owns more than 5% of the business is an HCE. Under the compensation test for 2025, an employee is an HCE if they earned over $155,000 in 2024. An employer may also have the option of limiting HCEs under the compensation test to the top 20% of employees by pay.
To satisfy the “primarily for the benefit of” test, the event must be open to all or most employees. While owners and HCEs can attend, the event’s structure and attendance must show that it was intended for the general workforce. For example, a party where the majority of attendees are non-highly compensated employees would meet this standard.
Qualifying Events and Attendees
The types of events that can qualify for the 100 percent deduction are varied but include activities like annual holiday parties, summer picnics, and other company-wide outings. These events are eligible as social and recreational activities that are primarily for the benefit of employees. The key is that the event is occasional and not a routine occurrence.
The deduction remains intact even when employees bring their families and guests. The IRS permits the inclusion of employees’ spouses and dependents, recognizing that these social events often involve family. Inviting these non-employee guests does not jeopardize the 100 percent deductible status of the event.
Impact of Other Guests
The nature of the deduction can change if the guest list extends beyond employees and their families. Inviting business clients, customers, or independent contractors to an employee party can alter its tax treatment. The portion of the event’s cost attributable to clients or customers would likely be subject to the 50 percent limitation for business meals, provided a legitimate business discussion occurs. If there is no business purpose, the cost for entertaining clients may be entirely non-deductible.
When the Deduction is Limited or Disallowed
The 100 percent deduction is disallowed if the event fails to meet the primary benefit test. If an event is organized almost exclusively for business owners, partners, and highly compensated employees, it will not qualify. In such cases, the expense is treated as a standard business entertainment meal and is subject to the 50 percent deduction limit. A family business where all employees are also owners, for instance, would not be able to claim a 100% deduction for a party.
Costs that are considered “lavish or extravagant” under the circumstances may also be disallowed. While there is no specific dollar amount that defines this term, the expense must be reasonable for the type of business and the purpose of the event. An excessively opulent party could attract IRS scrutiny and lead to a partial or full disallowance of the deduction.
Essential Record-Keeping Requirements
To secure a deduction for employee events, businesses must maintain records that can substantiate the expense in an IRS audit. Proper documentation is the only way to prove that the event qualifies for the 100 percent deduction. Your records should include:
- Receipts, invoices, and canceled checks to prove the amount spent on the event, detailing all costs like food, beverages, and venue rental.
- Documentation showing the date and location of the event.
- A written statement describing the business purpose of the gathering, for example, a note stating “Annual holiday party for all employees to improve morale.”
- Records of who was invited and who attended, such as copies of invitations and RSVP lists, to demonstrate that the event was not primarily for highly compensated employees.