Any entertaining you provide must be directly related to the conduct of your business or associated with a directly-related discussion that preceded or followed the meal or entertainment. This means that giving a party to establish goodwill is not enough to make the transaction deductible.
2. The guest list determines the extent to which you can write off the party.
a. So if you are following the above No. 1, you have a 100% write off if: a) The party is open to the general public, or b) the party is for employees and their spouses;
b. You follow the 50% limitation rule that applies meals and entertainment and write off half the cost if: a) The party is for customers, prospective customers and/or b) Independent contractors associated with your firm (they cannot be classified as employees for this purpose).
3. The entertainment may not be “lavish or extravagant” (one of those subjective, gray areas).
Proving the above is another matter. You want documentation, such as the invitation announcing the business purpose, the guest list, attendees, and keep all receipts.
When providing the expenses to your accountant, separate the cost of the party that is 100% deductible to a different category from “Meals and Entertainment”. Track it under “Promotion” or “100% Entertainment” to ensure the full write-off at tax time. Otherwise, your accountant may apply the 50% rule to everything under “meals and entertainment” and you will have lost a valuable write-off.
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