Business owners frequently incur entertainment expenses. To even think about deducting expenses with the IRS, owners must keep detailed records. Even with all the supporting documentation, only 50 percent of business-related meal and entertainment expenses are allowed as a deduction.
There are however circumstances when you can maximize your entertainment deduction and mix business with pleasure. Below is a summary of some of the least known meal and entertainment maximum deductions where the IRS cuts you a little slack.
1. Cruise Ships
You can deduct up to $2,000 per year of your expenses of attending convention, seminars, or similar meetings held on cruise ships. All ships that sail are considered cruise ships. You can deduct these expenses so long as the following requirements are met.
- The convention, seminar, or meeting is directly related to your trade or business.
- The cruise ship is a vessel registered in the United States.
- All of the cruise ship's ports of call are in the United States or in possessions of the United States.
2. Country Clubs, Golf and Athletic Clubs, Airlines and Hotel Clubs, etc.
Generally you cannot deduct dues (including initiation fees) for memberships in any club organized for business, pleasure, recreation, or other social purpose. However you can deduct 50 percent of out-of-pocket expenses, such as for food and beverages, catering, green fees and fishing bait, that you incur during entertainment at the facility. Additionally, if you purchase tickets to a golf tournament or sports event organized by a charitable organization you are not subject to the 50 percent limit.
3. Spouse Expenses
Generally you cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing entertainment. For example, you entertain a customer. The customer's spouse joins because it is impractical to entertain the customer without the spouse.
You can then deduct the cost of entertaining the customer's spouse. If your spouse joins the event because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible.
4. Events or Food Provided in the Workplace
While business-related meal and entertainment expenses are subject to the 50 percent limit, there are exceptions to the rule where meals and entertainment are 100 percent deductible. Below are instances when you can deduct all of the meal expense:
- Meal expenses when all employees are invited (ie company picnic or holiday party)
- Food consumed on the business premises to more than half of the employees (ie office snacks, breakfast, lunch, and dinner)
- Food made available to the public for free (usually for a promotional campaign but then again you can always invite the general public too and take a gamble on if they actually show up)
It is imperative you keep detailed records including the business purpose, the amount of each expenses, the date, place of entertainment, and the business relationship of the persons entertained. If you decide to be aggressive with deductions don't be surprised if the IRS is aggressive with analyzing your activities too. Always consult a CPA if you have any questions.