General tax rules say that if you incur entertainment expenses related to your business, you can deduct those expenses if the following are true:
More specific rules allow you to deduct entertainment expenses if they are directly related to your business or associated with your trade or business.
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.
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.
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