Can You Write Off Entertainment Expenses?

Navigating the deductibility of business expenses for tax purposes can be complex, especially concerning entertainment. Recent tax reforms, primarily the Tax Cuts and Jobs Act (TCJA) of 2017, significantly altered the landscape for these deductions. The rules are now considerably stricter than they once were. Businesses and individuals need to understand these changes to ensure compliance and accurately report their taxable income.

General Non-Deductibility of Entertainment Expenses

The general rule established by the Tax Cuts and Jobs Act of 2017 is that entertainment expenses are no longer deductible. This change applies to costs paid or incurred after December 31, 2017, eliminating deductions for activities considered entertainment, amusement, or recreation. The Internal Revenue Service (IRS) broadly defines entertainment as any activity that provides amusement or recreation, whether for business associates or employees.

Examples include tickets to sporting events, concerts, or theater performances, even if business discussions occur. Costs associated with golf outings, hunting, fishing trips, or the use of facilities like yachts or country clubs for entertainment purposes also fall under this disallowed category. The primary purpose of the activity determines whether it is classified as non-deductible entertainment, focusing on the event’s nature rather than any accompanying business discussion.

Deductible Business Meal Expenses

While entertainment expenses are largely non-deductible, specific rules permit deductions for business meals. For most qualifying business meals, a 50% deductibility rule applies, meaning businesses can deduct half of the ordinary and necessary food and beverage expenses incurred in operating their trade or business.

For a business meal to be deductible, several conditions must be satisfied:
The expense must be ordinary and necessary for the business, meaning it is common and helpful in the taxpayer’s industry.
The cost cannot be lavish or extravagant under the circumstances.
The taxpayer or an employee must be present during the meal.
Food and beverages must be provided to a current or prospective business customer, client, consultant, or similar business contact.
A business discussion must occur before, during, or after the meal, or the meal must be directly associated with the active conduct of business.

If food and beverages are provided during an entertainment activity, their cost is 50% deductible only if purchased separately or separately stated on the bill, invoice, or receipt.

Other Permissible Business Expenses

Beyond the general rule for business meals, certain other expenses, though they might appear similar to entertainment, are deductible under specific provisions. Expenses for recreational, social, or similar activities primarily benefiting employees are generally 100% deductible. This includes costs for events like holiday parties, annual company picnics, or summer outings, provided they are primarily for the benefit of employees other than highly compensated employees, owners, or their family members.

Another category of permissible expenses involves those treated as compensation to an employee. If an employer provides entertainment or a fringe benefit that is included in the employee’s gross income and reported on their Form W-2, the employer can deduct the full cost as compensation.

Expenses for entertainment made available to the general public are also fully deductible. An example would be a car dealership offering free tickets to an event to anyone who test drives a vehicle, as this serves as a form of advertising. Similarly, if entertainment is sold to customers as part of a bona fide business transaction, such as a theater producer’s expenses for staging a play, these costs are deductible as the cost of goods sold.

Small, infrequent benefits, known as de minimis fringe benefits, are also deductible and excludable from an employee’s income. These are benefits so small in value that accounting for them is unreasonable or administratively impracticable. Examples include occasional snacks, coffee, doughnuts, or holiday gifts of minimal value.

Documentation and Substantiation Requirements

Accurate documentation is important for all deductible business expenses, including qualifying business meals and other permissible expenses. The IRS requires taxpayers to substantiate these expenses to prevent disallowance.

Proper records must clearly establish several key elements for each expense. These elements include the amount of the expense, the time and place where it was incurred, and its specific business purpose. The business purpose should explain why the expense was necessary and the business benefit derived or expected from it. Detailed information about the business relationship of the people involved, such as clients, customers, or employees, must be recorded.

To meet these substantiation requirements, taxpayers should maintain meticulous records. This includes keeping original receipts, invoices, and credit card statements that show the expense details. For meals and other events, a detailed log or expense report should supplement these documents, noting the date, location, attendees, and the nature of the business discussion or activity. For expenses of $75 or more, documentary evidence like receipts is generally required.