Holiday Party Tax Deductions - Houston Business CPA
Last year, I told you how you can fully deduct your company's annual employee holiday party in the article "Deduct Your Employee Christmas Party". To recap, employee holiday parties, annual picnics, summer outings qualify for a 100% deduction of the costs as long as the event is "primarily" for the benefit of employees. This year let's dig a little deeper and learn if we can extend those deductible party invitations to clients, vendors & other business associates.
Can I Use the 100% Entertainment Deduction to Entertain Clients or other Business Associates?
The short answer is yes and no. Rule #1, any entertainment you provide to guests other than employees must be directly related to the active conduct of your business or associated with a directly-related discussion that preceded or followed the party. This means having a party for the sake of establishing goodwill is not enough to make it deductible.
Second; after you have met the first rule; your holiday party can qualify for the 100% entertainment deduction if it is open to the general public. For example, if you host "Mixer" in your place of business and anyone is allowed to attend - you can deduct 100% of the costs of the event.
What if I Do Not Want My Event Open to the Public?
If your event is not open to the general public and you invite clients, vendors, or other business associates it will not qualify for the 100% entertainment deduction. While the costs associated with entertaining your employees will still be 100% deductible, the costs associated with entertaining clients will only qualify for the 50% entertainment deduction - as long you still meet Rule #1 above which is to relate the party to your business.
So, How Do I Relate My Holiday Party to My Business?
This is where you can get creative - let guests know you are directly furthering your business by having this party or have a display setup with products, brochures with services/products offered, etc. Seal the deduction by hiring someone to manage the display and to answer any questions your guests may have.
Can I Deduct Guests that are Family?
Yes & No. As long as the party is primarily for the benefit of your employees and is not made up of more than 50% of the "tainted group". The tainted group is any employee paid more than $110k a year, a 10% owner or any family member of a 10% owner. If the family members are not employees or have any direct business relation - they cannot be deducted.
How Do I Allocate the Costs of the Party?
First off, you should have two entertainment deductions set up in your chart of accounts - one for 100% Entertainment and another for 50% Entertainment. So, if your holiday party has 100 guests and 50 of the party-goers are employees and their spouses, half the cost of the party will be 100% deductible. If the other 50 guests are clients, vendors or business associates, 50% of the remaining costs will be 50% deductible.
Don't forget to Document Everything!
You must document all of your expenses associated with the party, just as you must document any other entertainment. Always remember to write down the "who, what, when, where & why's". Like all deductions, you can't nail it down without writing it down.