What Entertainment Expenses Are Still Deductible?

The deductibility of entertainment expenses for businesses has seen substantial changes in recent years. These alterations stem primarily from the Tax Cuts and Jobs Act (TCJA), which reshaped various aspects of the tax code. Understanding what can and cannot be deducted is important for businesses to accurately manage their financial reporting and tax obligations.

The General Rule for Entertainment Expenses

Since 2018, entertainment expenses are generally not deductible. This includes costs associated with entertainment, amusement, or recreation activities. The Internal Revenue Service (IRS) defines entertainment broadly, encompassing activities like entertaining guests at sporting events, concerts, or social clubs.

This disallowance applies even if the expenses are directly related to the active conduct of a trade or business. For example, taking a client to a sporting event to discuss business falls under this non-deductible category.

Deductible Business Meals

While entertainment expenses are largely non-deductible, business meals generally remain 50% deductible. To qualify, the meal must be an ordinary and necessary business expense. This means the expense is common and accepted in the taxpayer’s industry, and helpful and appropriate for the business.

The meal must not be lavish or extravagant. The taxpayer or an employee must be present during the meal. Food and beverages must be provided to a current or potential business customer, client, consultant, or similar business contact. A substantial business discussion must occur before, during, or after the meal to establish its business connection. For instance, a meal with a client to discuss an ongoing project or a potential new engagement typically qualifies.

Other Non-Deductible Business-Related Expenses

Beyond the general disallowance of entertainment, certain other business-related expenses are non-deductible. Membership dues for clubs, such as country clubs, golf clubs, or athletic clubs, are not deductible. This restriction applies even if the membership is used for business development or client relations.

Expenses for facilities used in connection with entertainment are also generally non-deductible. This includes costs related to renting a suite at a sporting event or a private box, if the primary purpose is entertainment rather than a qualifying meal. While food and beverages purchased separately at such events might be 50% deductible, the cost of the entertainment facility itself is not. Travel expenses that are primarily personal, such as commuting costs, are also non-deductible.

Substantiating Deductible Expenses

Proper documentation is important for claiming any deductible business expense, particularly for business meals. The IRS requires taxpayers to maintain adequate records to substantiate these expenses. This includes recording the amount of the expense, the time and place where it was incurred, and the business purpose.

It is also necessary to document the business relationship of the person who received the benefit, such as a client or potential customer. Receipts, invoices, or other similar documents provide proof of payment. While small expenses may be substantiated by a taxpayer’s statement, expenses of $75 or more typically require documentary evidence.

Reporting Deductible Expenses

Self-employed individuals and small business owners typically report their income and expenses, including deductible business meals, on Schedule C (Form 1040), Profit or Loss from Business. This form calculates the net profit or loss from a sole proprietorship. Deductible business meal expenses are listed among other ordinary and necessary business expenses in Part II of Schedule C.

For employees, unreimbursed employee business expenses are generally not deductible for federal income tax purposes from 2018 through 2025. The temporary 100% deduction for business meals from restaurants, available in 2021 and 2022, reverted to the 50% limit starting January 1, 2023.