Entertainment
Generally, entertainment expenses are 100% nondeductible unless an exception is met. This means that no deduction is allowed for any expense with respect to an activity generally considered to constitute entertainment, amusement, or recreation, or for a facility used in connection with such an activity, even if the activity is related to the employer’s trade or business. Entertainment is defined broadly to include activities such as taking business associates (clients, suppliers, employees, etc.) to bars, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation, and similar trips. Generally, activities in these categories are considered entertainment for tax purposes, even though the employer’s intent is to deepen client relationships or bring in more business.
Examples
- An employee takes a customer to a baseball game. The cost of the tickets is nondeductible.
- A company’s executive team enters a golf tournament sponsored by a client. The expenses related to the executives playing golf (i.e., greens fees, cart rentals, etc.) are nondeductible.
- A company takes a group of clients on a fishing trip. The transportation, lodging, and fishing-related expenses are nondeductible.
There are several exceptions that, if met, may allow entertainment expenses to be deductible. These exceptions are:
- Expenses that are treated as compensation to an employee and as wages for tax purposes.
- Expenses that are reimbursed under certain expense allowance arrangements with customers.
- Expenses for recreational, social, or similar activities primarily for the benefit of employees (other than highly compensated employees and certain shareholders/owners).
- Expenses directly related to business meetings of employees, stockholders, agents, or directors.
- Expenses directly related and necessary to attendance at business meetings or conventions of certain tax-exempt organizations.
- Expenses for goods, services, and facilities made available to the general public.
- Entertainment sold to customers in a bona fide transaction for adequate and full consideration.
- Expenses includible in the gross income of a recipient who is not an employee.
Expenses for food and beverages provided at or during an entertainment activity are generally treated as part of the entertainment and are nondeductible. However, if the following requirements are met, the entertainment remains nondeductible, but the food and beverage expenses would proceed to another layer of analysis to determine their deductibility. If the following are satisfied, then the expenses are generally deductible:
- The food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts; and
- The amount charged reflects the venue’s usual selling price or the reasonable value of the items.
For example, if an employee takes a client to a baseball game and purchases hot dogs and drinks from a ballpark vendor, the deduction for the cost of the hot dogs and drinks can be evaluated separately from the disallowed deduction for the tickets.