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Topic 512 - Business Entertainment Expenses

Entertainment expenses that are both ordinary and necessary in carrying on a trade or business may be deductible if they meet one of the two tests discussed in Publication 463.

You must have records to prove the business purpose (under the applicable test) and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. For further information on record keeping, refer to Topic 305.

Generally, only 50% of food and beverage ("meal") and entertainment expenses are allowed as a deduction. For exceptions to the 50% limitation, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.

If you are an employee whose deductible business entertainment expenses are fully sustained and reimbursed under an accountable plan, the reimbursement should not be included in your wages on Form W-2 (PDF) and you should not deduct the expenses. If you are not reimbursed fully under an accountable plan, your expenses exceed the reimbursement you received under an accountable plan, or you are not reimbursed, use Form 2106 (PDF), or Form 2106-EZ (PDF) to report business entertainment expenses. These expenses, including expenses that exceed the reimbursement under an accountable plan, are carried over to Form 1040, Schedule A (PDF), and are generally subject to the 2% of adjusted gross income limit. Refer to Topic 508 for more information on the 2% limit, Topic 305 for more information on record keeping requirements, and Publication 463 for a definition of accountable and non-accountable plans.

If you are self–employed, use Form 1040, Schedule C (PDF), or Form 1040, Schedule C-EZ (PDF), or if you are a farmer, use Form 1040, Schedule F (PDF) to deduct these expenses.

In general, taxpayers may deduct ordinary and necessary business-related expenses for traveling away from home, entertaining clients and customers and giving gifts to customers, employees and others with whom they have a business association. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business.

Taxpayers who deduct these expenses must exclude personal expenses when computing their deductions and must have documentation for the expense, including statement of the business purpose, names of the persons being entertained, date and location. In addition, generally only 50 percent of business meal and entertainment expenses can be deducted.

Travel

Tax payers that travel away from home on business can deduct related expenses, including the cost of reaching their destination, the cost of lodging and meals and other ordinary and necessary expenses. You are considered “traveling away from home” if your duties require you to be away from home substantially longer than an ordinary day’s work and you need to sleep or rest to meet the demands of your work. The actual cost of meals and incidental expenses may be deducted or the taxpayer may use a standard meal allowance and reduced recordkeeping requirements. Regardless of the method used, meal deductions are generally limited to 50 percent as stated earlier. Only actual costs for lodging may be claimed as an expense and receipts must be kept for documentation. Expenses must be reasonable and appropriate; deductions for extravagant expenses are not allowable. More information is available in Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Entertainment

Expenses for entertaining clients, customers or employees may be deducted if they are both ordinary and necessary and meet one of the following tests:

Publication 463 provides more extensive explanation of these tests as well as other limitations and requirements for deducting entertainment expenses.

Directly-related test: The main purpose of the entertainment activity is the conduct of business, business was actually conducted during the activity and the taxpayer had more than a general expectation of getting income or some other specific business benefit at some future time.