26 Jan 2010

Entertainment Expenses in the United States

by Darren

Entertainment under the US code has been defined to mean any activity that provides for entertainment, amusement or recreation, including meals for clients and employees.

Business related entertainment expenses incurred that are ordinary, necessary and meet either the directly related test OR the associated test are deductible under US tax law.

In order for your business to successfully claim a deduction under the directly related test the entertainment expense must

  • be in a clear business setting such as at a convention room, office.
  • have a main purposes of conducting business
  • engage in business during the entertainment
  • have a greater than general expectation of earning income or some other specific business benefit

In case there are ‚Äúsubstantial distractions‚ÄĚ in the entertainment situation then the expenses are non-deductible.

Examples include nightclubs, theaters, sporting events and cocktail parties.

They are also non-deductible where the business meeting takes place in a group, which includes persons who are not business associates.

The associated test requires the entertainment to be:

  • associated with your trade or business. Examples include a purpose to gain new business or the continuation of existing business.
  • directly prior to or after a substantial business discussion. You must prove that you actively engaged in the discussion, meeting or negotiation.

So to improve your tax situation prior to spending your business' cash on entertainment ensure that the above criteria are met.

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