Are you having a Holiday Party?
The party is 100% deductible for employees and their spouses. Thus, you will need to categorize the party to an account perhaps titled “100% deductible entertainment.”
To prove your deduction, you should document the names of the employees and spouses who attended the party. Plus, you should have both receipts and canceled checks to prove your expenditures. There are no limits on this deduction other than the standard requirement that the expenses may not be lavish and extravagant.
However, if your only employees are your spouse and children then the holiday party is not deductible. Under ownership attribution rules that apply to entertainment expenses, the law deems that your ownership interest applies equally to your spouse and children. Thus, if you own 100 percent of the business, so do your children and your spouse.
If you are inviting your customers,vendors, prospects and friends to your holiday party, you must prove that your party is either
- directly related to the active conduct of your business, or
- associated with a directly related discussion that preceded or followed the party.
These people are subject to the normal entertainment thus only 50% deductible.
If you are inviting Independent Contractors to your holiday party, they also are only 50% deductible. They do not qualify as employees for entertainment purposes.
In order to support your deduction, you should have a list of guests.
For employees and their spouses, the employees’ names give you the business reason for the party.
To deduct the cost of the party attributable to customers, independent contractors and friends, you must have either
- a directly related business discussion related to the active conduct of your business in a clear business setting, or
- associated entertainment that follows or precedes a bona fide business discussion.
To make this work with the least amount of effort, incorporate group discussion that will help move your business or practice forward.
A good practice is to include your active business pursuit in your invitation, with wording like “Please come for holiday cheer and to help us celebrate 15 years in business.” Another good practice is to take photos of attendees viewing a bulletin board covered with your product brochures.
Do not deduct the costs attributable to those friends and relatives who are NOT in attendance for business reasons. For example, say you have 50 people at the party, and five are relatives who will not produce any business benefit for you. Treat 10 percent of the costs (5 of 50) as nondeductible personal expenses.
You will also want to prove your costs with receipts such as a canceled check, an ATM receipt or a credit card receipt.
If you would like to learn more about this tax strategy, please call Susan at 847.895.9880.