Is Employee Entertainment Tax Deductible?
Navigate complex IRS rules for employee entertainment. Discover which expenses are tax deductible and how to document them for your business.
Employee entertainment expenses and their tax deductibility are complex for businesses. While many business-related costs are deductible, the rules surrounding entertainment have undergone significant changes in recent years. Understanding these regulations is important for compliance and tax management.
General Non-Deductibility of Entertainment Expenses
Most entertainment expenses are not deductible. This non-deductibility stems from changes introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, which largely eliminated the prior 50% deduction effective January 1, 2018.
The Internal Revenue Service (IRS) defines “entertainment” broadly to include any activity providing entertainment, amusement, or recreation. This encompasses activities such as taking employees or clients to sporting events, concerts, theater performances, or golf outings purely for amusement. Expenses related to facilities used for these activities, like golf club dues or private boxes, are also generally non-deductible. These costs are typically not allowed as business deductions.
Deductible Employee Recreational and Social Activities
Despite the general rule against entertainment deductions, there is an exception for recreational, social, or similar activities primarily for the benefit of employees. Expenses for these activities are generally 100% deductible for the employer. These activities promote employee well-being and morale.
For these expenses to be fully deductible, the activities must be primarily for the benefit of all employees, or a significant portion of them, and cannot discriminate in favor of highly compensated employees or owners. Examples of such deductible activities include company picnics, holiday parties, annual employee retreats, or an employee bowling league. The IRS considers these expenses fully deductible as they are meant for the general welfare and morale of the workforce.
De Minimis Fringe Benefits
Another category of deductible employee benefits that might include entertainment-like items are “de minimis fringe benefits.” These are defined as items of property or services whose value is so small that accounting for them would be unreasonable or impractical. Such benefits are excluded from an employee’s gross income and are fully deductible by the employer. The IRS does not specify a precise monetary threshold, but items valued at $100 or more generally do not qualify.
Examples that fall under this category include occasional employee meals, such as coffee and donuts, occasional office snacks, or group meals provided for employees working overtime. Small holiday gifts, if non-cash and low value, can also be considered de minimis. Occasional tickets for entertainment events, if infrequent and of small value, might also qualify. Their small value and infrequent provision distinguish these benefits from larger, non-deductible entertainment expenses.
Substantiating Deductible Employee Expenses
To claim any deductible employee entertainment or meal expenses, businesses must maintain proper documentation. The IRS requires substantiation to prove the expense was for a legitimate business purpose. Without adequate records, the IRS may disallow the deduction.
Specific details required for substantiation include the amount of the expense. Businesses must also record the time and place. A clear explanation of the business purpose, such as improving employee morale or team building, is also necessary. Documentation should include the business relationship of the persons involved, indicating whether it was for all employees or specific departments. Keeping detailed records, including receipts, invoices, and logs, is important during a tax audit.