pizza on white ceramic plates

 

Note: The Tax Cuts and Jobs Act has eliminated the deduction for 50 percent of the costs of entertaining clients and customers for amounts paid or incurred after December 31, 2017. Food and beverages provided during entertainment events are not considered entertainment if purchased separately from the event. You can still deduct 50 percent of the cost of food and beverage expenses associated with operating a trade or business (e.g., meals consumed by employees on work travel.) However, for 2018 to 2025, the deduction for miscellaneous itemized deductions subject to the 2-percent floor, including unreimbursed employee expenses, has been suspended, and cannot be claimed as an itemized deduction on Schedule A. If you are an employee, you will not be able to deduct your unreimbursed expenses.

What Is It?

You can deduct 50 percent of your unreimbursed costs of entertaining clients and customers, including the costs of meals, as long as the entertainment is related to a business purpose. For employees, this deduction is further reduced by the 2 percent adjusted gross income floor on your Schedule A. However, the IRS scrutinizes these deductions very closely, so, as with all business expenses, you should keep detailed records. In addition, certain business gifts are deductible, subject to separate limitations.

Deductibility Tests

For your entertainment costs (including the cost of meals) to be deductible, they must meet one of the two following tests:

"Directly Related" Test--The Entertainment Is Necessary for and Directly Related to The Active Conducting of Your Business

To meet this test, you must:

  • Actively engage in the business meeting, discussion, or activity with the person or persons being entertained
  • Expect to derive income or some other specific business benefit (other than just good will)
  • Intend the active conducting of your business as the purpose of the combined business-entertainment

Tip: Although it need not be so, if the entertainment occurs in a clear business setting (e.g., entertainment held for publicity purposes to herald the opening of a new store) or if you entertain people with whom you have no personal or social relationship, then the activity will generally be presumed to meet the directly related test.

Caution: Entertainment generally will not meet the directly related test if you are not present during the entertainment, if the distractions of the entertainment are substantial (e.g., a sporting event), or if you meet with a group that includes both business and nonbusiness associates at the place of entertainment. However, such entertainment expenses may qualify under the "associated" test.

"Associated" Test--The Entertainment Is Associated With The Active Conducting of Your Business

To meet this test, the following must apply:

  • The entertainment activity must clearly have a business purpose
  • The entertainment must directly precede or directly follow a meeting or discussion that has a clear, substantial, and bona fide relationship to your business

Tip: If you meet the "associated" test, the entertainment can be held in nonbusiness-related settings, such as restaurants, theaters, or sporting events. For instance, you might take a prospective client to lunch and then discuss the possibility of his or her company hiring your company to provide technical support.

Tip: The business discussion or meeting generally must be held on the same day as the entertainment that precedes or follows it. However, the IRS does recognize exceptions, as demonstrated by the following example:

Example(s): Say some prospective new business customers arrive from out of town on Tuesday for a new product presentation on Wednesday, and on Tuesday evening, you take them to dinner. You may deduct, as an entertainment expense, the cost of dinner on Tuesday.

Both the "directly related" test and the "associated" test include entertainment directed toward acquiring additional business clients or customers or toward furthering and continuing an existing business relationship.

Whom Can You Entertain and Still Deduct the Costs?

If the entertainment meets either the "directly related" test or the "associated" test, you can deduct the costs if the entertainment pertains to any of the following:

  • Present or prospective clients and customers
  • Suppliers
  • Employees or partners
  • Agents
  • Prospective or established professional advisors

Goodwill Entertainment

If the purpose of business-related entertainment is strictly to promote goodwill, then the cost is not deductible. However, if the purpose is both goodwill and a related business purpose, then the entertainment is deductible.

Example(s): Suppose you invite a number of clients to an evening baseball game, during which business is not discussed. Here, your intention is to cultivate goodwill, so the entertainment cost is not deductible. However, if you hold a business meeting with the clients at your office during the afternoon preceding the baseball game, the entertainment costs of the game would qualify, even if no business is discussed at the game (assuming no part of the costs includes rental of a skybox or private luxury box).

Example(s): Suppose you hold a dinner party for prospective clients at a local hotel. The entertainment cost is not deductible. However, if, during the course of the evening, you present a 45-minute slide show of new products and services your company is debuting, then the entertainment costs of the dinner party would be deductible.

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Entertaining At Home

You can deduct the cost of having business clients or customers to your home for dinner or another meal if a business-related discussion takes place before, during, or after the meal.

Deducting For Your Meal-Related Entertainment Costs

If you entertain business customers or clients when you are on business away from home, you can deduct the cost of your meal as part of your own travel expenses, and deduct the cost of their meals as an entertainment expense (assuming the meal meets one of the qualifying tests).

Caution: If the entertainment meal is held in the area of your primary place of business, you generally can deduct the cost of your portion of the meal, unless the IRS finds an abusive pattern of taking such "close to home" personal meal deductions. Accordingly, it is best to consult with your accountant or tax attorney before deciding whether such deductions are justifiable.

Deducting Your Spouse's Entertainment-Related Costs

If you can deduct the cost of entertainment under the "directly related" test and your spouse was present, the cost attributable to your spouse can also be deducted. Your spouse's share is also deductible for goodwill entertainment that qualifies for deduction.

Tip: The IRS recognizes that, in some instances, it is impractical not to have your spouse attend a business entertainment event. In those cases, the cost of your spouse's attendance is deductible.

Example(s): A business customer from out of town travels to your company on Monday to view your new product line. He is accompanied by his spouse. That evening, you and your wife take him and his wife to dinner. Here, the cost of dinner would qualify for deduction under the "associated" test. However, since it may be impractical not to have your wife accompany you to dinner, the cost of her dinner is also deductible.

Deducting for Facilities Used for Entertainment

You typically cannot deduct the cost of maintaining an "entertainment facility" (e.g., a lodge or vacation home, a yacht, or a swimming pool) even if you regularly use it for business purposes.

Tip: Some of the costs of such facilities, however, may be deductible under other portions of the tax code (e.g., property taxes and mortgage interest on a second or vacation home).

Tip: The cost of food or other entertainment provided at an entertainment facility can be deducted if the entertainment qualifies under the "directly related" test or "associated" test.

Tip: Under the Internal Revenue Code, season tickets to sporting or theatrical events are not considered entertainment facilities and therefore may be deductible when used for a qualifying entertainment purpose (assuming the tickets are not for a skybox or private luxury box).

Caution: You may deduct only for the face value of the cost of tickets. Additional charges (e.g., processing fees, fees paid to ticket agencies, or a "scalping" fee) are not deductible.

Luxury Boxes

There are limitations on the deductibility of rental payments made for "skyboxes" or private luxury boxes at sporting arenas, even when such boxes are used for entertainment that meets either the "directly related" or "associated" test. Skybox or luxury box seats at an entertainment or sporting venue are subject to a nonluxury box ticket price limitation.

Example(s): Suppose your company has a 10-seat skybox at a professional sporting arena and that the cost per seat per game in your luxury box equals $80 per seat. Similar nonluxury box seats cost $60 per game. In this case, you could only deduct $300 per game when the luxury box is used to entertain business clients or customers ($60 multiplied by 10, reduced by the 50 percent limitation on meal and entertainment costs), and the entertainment otherwise qualifies for deduction. The cost of food served in the luxury box is also deductible (assuming the entertainment qualifies); this cost is not subject to the luxury box limitation, but it is limited by the 50 percent rule.

Tip: Note: If you rent a luxury box for only one event, the luxury limitation does not apply.

Deducting Club Costs and Dues

You cannot deduct the costs, including dues, of clubs such as golf clubs, athletic clubs, or business lunch clubs. You may, however, be able to deduct the costs of certain business-related associations (e.g., fees paid to a chamber of commerce or a bar association).

50 Percent Limit on Deducting Meal and Entertainment Costs

Meal and entertainment costs (including taxes and tips) that otherwise qualify for deduction are subject to a 50 percent deduction limitation. This includes all meals and entertainment costs discussed in this section. Moreover, if, instead of keeping strict records of your meal costs, you choose to use the daily IRS meal allowance, the 50 percent limitation applies to these amounts.

Exceptions to The 50 Percent Limitation Rule

The 50 percent limitation on the deduction of meal and entertainment costs does not apply to you as an employee if your employer reimburses you under what is known as an accountable plan and does not treat the reimbursement as wages. If you are an employer, there are a number of exceptions to the 50% limitation rule that apply to reimbursements for meal and entertainment expenses made to your employees and for expenses related to certain charitable events.

Tip: For more information on accountable plans and reimbursement exceptions, consult your accountant or tax attorney.

Business Gifts

Gifts to business clients or customers are deductible, up to a maximum amount of $25 per recipient per year. However, when figuring the $25 limitation per recipient, do not include the following items:

  • Specialty advertising items (pens, key chains, and other items that have your or your company's name printed on them) that cost $4 or less
  • Signs, displays, or other promotional items that you give to a business customer or client to be used at his or her place of business
  • Related incidental costs, such as the cost of wrapping or sending the gift

Tip: Gifts made to the spouse of a business customer or client, or gifts made to a corporation or company that are intended to be used by a specific business customer or client, are considered for business gift tax purposes to be gifts made to the business customer or client.

Entertainment or Gift?

If an item can be considered either as a gift or as a qualifying entertainment expense, it can generally be considered and taken as an entertainment expense (subject to the 50 percent limitation). However, note the following conditions:

  • Theater or sporting tickets must be considered a business gift if you do not accompany the business customer or client to the event
  • Packaged food or drink, given to and intended for consumption at a later time by a business customer or client, must be considered a business gift

Exceptions to The $25 Business Gift Limitation

There are two exceptions to the $25 business gift deduction limitation:

  • Certain tax-free scholarships
  • Certain tax-free prizes and awards In addition, noncash awards made to employees for special achievements or dedicated service are subject to higher deduction limitations, as long as the awards are not disguised compensation. These higher deduction limits are subject to the following rules:
  • There is a $1,600 deduction ceiling per year per employee if the awards are not disguised compensation and are under a qualified plan award. To be a qualified plan award, the plan must be in writing, each award must not average a cost of more than $400, and the plan must not discriminate in favor of highly compensated employees.
  • If the awards do not come under a qualified award plan, there is a $400 deduction ceiling per year per employee.

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

 

The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

 

The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.



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