General tax rules say that if you incur entertainment expenses related to your business, you can deduct those expenses if the following are true:
The activity provided amusement or recreation, including meals, to a customer or client.
The expense was common and accepted in your field of business, trade or profession.
The expense was helpful and appropriate, although not necessarily indispensable, for your business.
More specific rules allow you to deduct entertainment expenses if they are directly related to your business or associated with your trade or business.
The entertainment took place in a clear business setting, or
the main purpose of entertainment was the active conduct of business, and
you engaged 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.
The entertainment was associated with your trade or business, and
the entertainment directly preceded or followed a substantial business discussion.
You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense.
You can deduct expenses only to the extent they are not lavish or extravagant under the circumstances.
You generally can deduct only 50% of your business entertainment expenses.
If your client brings along a spouse, you can bring yours, too, and deduct the cost as an entertainment expense.
Proving Deductibility Keep good records of business entertainment. For instance, if you throw a business party, keep a written guest list. Note the business connection of the guests or general nature of business discussed. This should satisfy most IRS auditors, unless the amount spent was outrageous. But auditors don't contact guests to see whether or not business was discussed or there was a business tie-in.
Home Entertainment Deductions You can deduct home entertaining if you follow the rules. To qualify, guests must either be employees or have a business connection - that is, they must be a present or potential customer or client. If family or social friends are also present, their pro-rata share of party costs is not deductible. If you are audited, show you gave other purely social parties that you did not claim as business expenses. For guests other than employees, keep notes showing who was present and the nature of the business discussed before, during or after the get-together.
Business Gifts You can deduct gifts to clients and customers in full as long as the value does not exceed $25 per person per year. You can also deduct the cost of wrapping, mailing or even engraving the gift, so the real limit is slightly higher than $25. Also, gifts costing up to $400 on which your business name is imprinted aren't counted against the $25 limit.