Throwing a Holiday Party? Then you need these Tax Tips to Write it Off

There’s nothing better than throwing a holiday party for your employees, especially if you’ve had an excellent year and profits have been good. If you’re putting out quite a bit of money to do it, you’ll definitely want to write off the expenses on your taxes. While it certainly isn’t it illegal or immoral, keep in mind that the IRS has special rules when it comes to writing off entertainment expenses. If you use them or interpret them the wrong way, you may find yourself facing problems or fines down the road.

The simple fact is that entertainment is not only a necessary but regular business expense for many companies. The need to be in touch with your clients and show them your “human side” is vital to a strong business relationship. In many industries it’s also vital to network with people from related industries in order to generate more B2B business. In any case, most business owners believe that the expense of providing all of the food, drink and entertainment at these functions is deductible. But is it?

In order to be deductible any type of entertainment that you have, including an open house, parties and so forth, must come with some type of discussion about business not only before but during and after the event. If you throw a party simply for “goodwill” reasons your expenses are not deductible.

The one exception to this is if you throw a party for your employees and their families. A Christmas or holiday party of this kind is 100% deductible, even if you invite the general public. Interestingly, if you invite “friends” the money that you allocated to entertain them is not deductible.

If you want your party expenses to be deductible when you’re throwing it for customers or business associates, as we mentioned above, there must be substantial business discussions made including either a presentation, a speech a “reveal” or something else along those lines. Even then, the IRS rules for entertainment say that you can only deduct 50% of any of the expenses for said party.

If you invite employees of the company to this event than any of the money that you allocate for their entertainment, food and drinks is still 100% deductible. Of course it’s in your best interest to make sure that you have any and all documentation to prove exactly who was there, what was spent and how much everything ended up costing. If you send out invitations you definitely should keep a copy of one to show that it was for business purposes.

A good example is something like this; “You are cordially invited to attend the reveal of our new shake maker. Make sure to stay and get your drink on with us afterwards.” Even better is if you videotape the reveal as you can not only use this for excellent social media marketing but, in the event of an audit, you’ll have sufficient proof.

It’s also an great idea to keep a copy of the guest list and make a total of the different types of guests including customers, employees and friends. This is especially helpful if you’re going to need to allocate the expenses and explain them to your bookkeeper so that he or she can record the transactions properly.

Of course the best thing to do is make sure that your tax professional knows exactly what the party was about and who was invited.  In this way they can keep it separate from any other entertainment expenses that you might have during the year and make sure did that it’s recorded properly at years end on your tax return.

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