How do I know if my entertainment expenses are deductible?

business-expenses

Dear M & M:

How do I know if my entertainment expenses are deductible?

– Bill

Dear Bill:

I would strongly advise contacting a qualified CPA or tax preparer to answer your questions directly to make sure you are correctly getting the proper deductions on your entertainment expenses.  According to the IRS; “You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests (directly-related test or associated test). An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary. The amount you can deduct for entertainment expenses may be limited. Generally, you can deduct only 50% of your unreimbursed entertainment expenses (See 50% limits for a better understanding in IRS 50% rules). To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that: The main purpose of the combined business and entertainment was the active conduct of business, You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit at some future time. Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility (See Entertainment facilities under What Entertainment Expenses Are Not Deductible?).  You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. It is not necessary to devote more time to business than to entertainment. However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test.

Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. The following are examples of situations where there are substantial distractions:  A meeting or discussion at a nightclub, theater, or sporting event, a meeting or discussion during what is essentially a social gathering, such as a cocktail party, a meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts. Even if your expenses do not meet the directly-related test, they may meet the associated test. To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: Associated with the active conduct of your trade or business, and directly before or after a substantial business discussion” – IRS.  There are many other examples where an expense is deductible if it associated with trade or business such as meetings at conventions or rules that apply to a meeting before or after the business discussion. Another example from the IRS, “A group of business associates comes from out of town to your place of business to hold a substantial business discussion. If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion. The expense meets the associated test” –IRS.  Once again to be certain contact a qualified CPA or tax advisor. There are many gray areas and you want to be certain you are taking the correct deductions. The last example shows how muddy the waters can be. According to the IRS, “You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment” –IRS.

 -M&M

To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation (EDF) at 520-458-6948 or email  hollism@svedf.org .

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