Deducing what you can deduct

One of the nice things about running your own business is that you can take a tax deduction for 50 percent of expenses related to entertaining clients, customers or employees. There are, of course, rules. For example, you can deduct entertainment expenses only if they are both “ordinary” and “necessary” and meet one of two tests: the “directly related” test or the “associated test.”
Let’s look at what those things mean. First, “entertainment” includes any activity generally considered to provide amusement, entertainment or recreation – including meals. An “ordinary” expense is one that’s common and accepted in your particular trade or business. And a “necessary” expense is one that is helpful and appropriate in a business context.
That leaves lots of room to include a wide range of business-related entertainment expenses.
Your entertainment expense will meet the directly related test if:
1) The entertainment took place in a clear business setting; or
2) The main purpose was to actively engage in some kind of business (which you did), and you had more than a vague expectation of generating income or some other specific business benefit.
You don’t need to devote more time to business than to entertainment. And you do not have to show that the entertainment actually produced any income or other benefit for your business.
Club dues and membership fees are not deductible. This includes country clubs, golf and athletic clubs, airline clubs or hotel clubs. Expenses for use of an entertainment facility are also not deductible. This includes such things as a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane hotel suite or home in a vacation resort. You can, however, deduct expenses for food, drinks, catering, gas and fishing bait that you provided during the entertainment. You pass this test if the entertainment you paid for was associated in some way with your business or trade, and it took place directly before or after a substantial business discussion of some kind.
You cannot deduct expenses considered lavish or extravagant under the circumstances, and you generally can only write-off half of the costs.
The definition of lavish, however, is vague and depends on the circumstances. The IRS will not disallow a deduction just because it exceeds a certain amount or takes place at a deluxe restaurant, hotel, nightclub or resort. •


Daniel Kehrer can be reached at editor@bizbest.com.

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