Entertainment Allowance on Tax Deductions
Entertaining clients and potential clients is part of business life. If you have to wine and dine clients or take them out to the ball game as part of running a small business or servicing an account for your employer, you can deduct part of your unreimbursed expense. Usually the allowance you can take off your taxes is 50 percent of the cost, whether the entertainment is a meal or an event.
You can't claim any entertainment write-off unless the fun is directly related to or associated with your business. Events are directly related to business if they take place in, say, a convention hospitality room or at the opening of your new restaurant, and if business is the focus of the event. It's associated with business if you had a goal such as landing a new client, and if business took place immediately before or after the event.
The 50 percent allowance for entertainment is a general guideline, not a guarantee. If the IRS thinks your spending is extremely lavish, it may limit how much you can deduct. And no, there's no hard-and-fast definition for "lavish." There are times when you can exceed the allowance. If, say, you're giving away food to customers or raffling off tickets to a sports event, that counts as advertising and is fully deductible.
Renting a suite at a conference to entertain clients is deductible, subject to the 50 percent limit. If you go beyond that -- taking your clients to a yacht or a hunting lodge, or renting a nightclub for an event -- some of your costs won't be deductible. Food, drink and gas to drive there are eligible, but the cost of renting or owning a yacht, say, doesn't become a write-off just because you bring a client there.
If your client or your boss reimburses you for your spending, don't worry about tracking the allowance. The person reimbursing you is the one who has to abide by the 50 percent limit. Of course, you can't take a write-off for any expense for which you get reimbursed. If you're an employee and your boss doesn't reimburse you, you can claim the write-off only if you itemize deductions on Schedule A.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.