Tax Deductions and Your Company Holiday Party

If you’re planning to throw a holiday or end-of-year party for your small business, you’re probably wondering about the potential for tax write-offs. Use the following information as a basic guide for taking tax deductions on expenses incurred for your company’s holiday party.

holiday-party-1 No matter what size your business is, holiday or end-of-year parties are a nice gesture for thanking employees for their hard work during the year. Other business owners may wish to hold a party for business associates or to show customer appreciation. Even if you plan to throw a very casual party, the costs can add up quickly.

In order to offset these costs, many business owners consider taking tax deductions on the expenses, but may not be sure which costs are deductible. Furthermore, many business owners don’t even try to deduct these costs because they know that entertainment expenses can raise red flags with the IRS and they’re afraid of a potential audit.

While it’s true that the IRS scrutinizes entertainment expenses thoroughly, and has strict rules in place for deducting these types of expenses, that doesn’t mean that you should avoid them entirely out of fear. Entertainment costs can be legitimate business expenses, but you have to abide by the IRS’s rules if you wish to take them.

Although you know that entertainment costs are necessary for staying in business, you can’t simply consider every event when you talk business or seek out new connections as a potential deduction.

“Having a party for business associates and clients simply to promote goodwill is not a valid deductible expense,” states Bonnie Lee from Fox Business. “And if it’s presented that way in audit it will be disallowed – usually with a snicker from the auditor.”

stk313110rknIf you do wish to have a party for customers or business associates and take a deduction, you must be sure to incorporate a substantial business discussion during the event. What counts as a substantial business discussion can be complicated. Some general examples of what could be considered an appropriate reason to deduct the costs are a business presentation or the reveal of important new business plans.

In order to be entirely sure what the IRS will look upon it favorably, however, it is necessary to talk to a tax professional. This truly is such a murky area that only tax professionals know exactly which aspects of the events to consider when determining if the event can be considered a necessary business expense or not. Even if the reason is legitimate, there are still other rules about how much can be deducted.

A party for your employees is another case entirely. If the party benefits the employees and their families, and not your business, the costs incurred are deductible. If you allow employees to bring friends to the party, however, the portion of cost of the party that was spent on them is not deductible.

“If you hold a party for your staff — in your facility or a restaurant — you can deduct all of the cost in this instance,” states Barbara Weltman on Yahoo Small Business. “As long as the party is for the benefit of employees and is not limited to the top brass, you can write off 100 percent of your costs.”

holiday-party-2If you have a party with a mix of employees, business associates and customers, things get even trickier. “For example, 50 employees, 50 customers and 50 friends attend your party,” states Lee. “The party costs $1,500. You will be allowed to write [off] $750 – $500 (100 percent deduction) for employees, $250 (50 percent deduction) for customers and zero for your buddies.”

As with all deductions, especially red flag deductions, it’s important to take meticulous records and save all documents. For example, keep copies of the invitation, guest list, any photos or videos of the party and receipts for all expenses. Your tax professional can help you determine how much documentation you need.

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