Successful businesses are mostly “all work and no play” but every once in awhile there is reason to throw a party. Maybe you want to celebrate the contribution of your employees on a holiday or when a milestone is reached. Or perhaps you want to thank your customers and entice prospects by hosting a gathering at your business.
Fortunately the cost of a business party is tax deductible but there are specific requirements that must be followed. In this blog post, we’ll summarize the rules and provide tips on how you can take full advantage of this deduction.
Everyone of us has likely attended a company holiday party, employee appreciation day, or other staff event at some point in our careers.
The cost of these events is fully deductible as long as it’s hosted primarily for your employees. That means they’re allowed to bring their spouses or significant others but you, the business owner, should not invite your friends, family, or favorite customers. The party needs to be for the enjoyment of your staff and their loved ones.
It’s also common for some businesses to host customer appreciation parties or events aimed at generating more business. In these cases, the meals and entertainment tax rule applies so 50 percent of the cost is deductible.
In order to qualify for this deduction, your event doesn’t need to have a specific business purpose. However, you will need to show that the event was either:
- directly related to the active conduct of your business, or
- associated with a directly related discussion that preceded or followed the party.
Basically, the IRS considers the party the same way it does when you take a customer to lunch and discuss business.
What if you have employees and customers at the same party?
Hosting a party that is attended by both your staff and customers can happen. When it does, your party cost deductions are proportional to the attendees – meaning they’re based on the percentage of guests in each employee/spouse or customer/client category.
How to take advantage of the party deduction
To substantiate your deductions, whether they are for an employee party or a business-based celebration, you do what you do for all tax deductions: Document, document, document.
Start by saving all your receipts for party expenses. You might worry the grocery store receipt for your staff 4th of July BBQ is going to be long gone by the time you talk with your tax preparer in the spring. But you can now use mobile apps to snap a photo of the receipt and instantly upload the record to your cloud document storage.
It’s also a good idea to keep a list of attendees for your company’s events – noting names, addresses and in the case of clients, the business relationship. A guest book can help, as will photos and videos taken during the event. In the unlikely case you get audited, these records will help. But in all likelihood, they’ll only ever be used to look back at the good time.
You’re probably a fun boss and business owner if you host parties and events for your staff and customers. You also want to be sure you get the full tax benefits of being a great host.
So make sure you know and follow these rules and tips. Then have fun!
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