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Holiday Party and Entertainment Deductions for Small Business Owners

December 26, 2013

It’s the holiday season and companies are holding parties and giving gifts to their employees. Although taxes are not necessarily thought about at celebrations, you can save in taxes if you plan parties or entertainment properly. However, expenses on entertainment can be a little complicated.

Only certain entertainment expenses are tax deductible for employers. A party thrown for employees for their benefit is a tax deductible for the employer. However, employees are required to report and pay taxes on gifts or cash they receive from employers. The IRS considers gifts from employers to be income and requires them to be reported as such.

A party thrown for the business partners to build goodwill is not tax deductible, but a party where significant business discussions are conducted can be written off. If there is business alongside entertainment, in most cases the party can be deducted.

The highest tax deduction you can claim for entertaining clients or customers socially is 50% of the total cost. The 50% limit applies to entertainment expenses on clients and customers, and business-related meals. If you have invited friends along with clients, you will need to separate the expenses on clients and friends for tax purposes.

It is important to keep documentation of how many people attended the party to be able to deduct taxes accurately. Keeping a copy of the invitation card, photographs of the party or a video clip can help in providing proof in case there is an audit.

Extravagant parties are likely to catch the notice of the IRS. A large company spending thousands on a party might not be considered extravagant by the IRS, but the amount spent on a holiday party should be reasonably consistent with the level and value of the company. Being spendthrift might make the IRS look closer. A party can be planned in such a way as to allow the company to save maximum taxes on entertainment.

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