When owning or running a business, we frequently go to business lunches, or attend business happy hours, or take potential clients to sports games, or even have business parties on the weekend! I like to write off business expenses as much as any other business owner, but taking advantage of entertainment write-offs can be rejected and cause all kinds of issues when dealing with an auditor at tax time.
Not to worry- with a little balance and carefulness, these 3 rules for writing off entertainment costs can save you a headache next April.
1. Conduct business First. (Or last.)
When you write off a meal or event, make sure it is revolved around business, and that business is conducted during these meetings. Personally, I like to get business out of the way first. But you can save it for dessert if you like- such freedom in owning a business! But make sure that if you are deducting a meal or entertainment outside of the office that you are either discussing business strategy, solving current problems, or figuring out the next steps to take on a new project. Simply mentioning work-life and then discussing nothing else but relationships, kids, or Hollywood gossip (guilty!) does not qualify as a valid deduction in your entertainment costs. The same goes for parties and large gatherings. Simply throwing a party is not enough to qualify as a deduction. There must be an educational speech, a new product or service reveal, or some kind of riveting sales pitch!
2. Check your guest list.
You may not know this, but if you throw a party for employees and spouses, or an event that is open to the public, you can deduct this event 100%! But here’s the tricky part. If the party is for clients, potential clients, and independent contractors, then only 50% of the cost may be deducted. If you have a mix of all of the above, part of the cost may be written off 100%, and the remainder may be a 50%-write-off, depending on the number of guests in either category. This is a good time to talk to your tax consultant.
3. Record to defend!
It wouldn’t be fair if we threw parties and had nice dinners without having a disclaimer, right? A good rule of thumb is that if it’s too much fun, you probably can’t deduct it. So calm down, and stop smiling. Just kidding. But just to cover yourself and your business, make sure that you keep every receipt and that you record all the necessary information to ensure your deduction qualifies. Keep a record of your guest list. Record your sales pitch, speech, or product/service launch in an itinerary. I would even make sure to include pictures and a video- just to be safe! Plus, if you are dressed really fancy, you would want something to remember the event, right?
We are masters at keeping organized records of clients’ expenditures. If you need help figuring out what to deduct and how to keep it all straight, we’ve got you covered. firstname.lastname@example.org.