The Ultimate Guide to Entertainment Expense Deduction in 2022: What You Need to Know
Are you an entrepreneur, small business owner, or freelancer who enjoys taking clients out for meals or entertaining them with activities? If so, you may be eligible for a tax deduction under the entertainment expenses category. However, with the recent changes in the tax laws, it might not be easy to know what expenses are deductible and what’s not.
In this ultimate guide to entertainment expense deduction in 2022, we’ll take a closer look at what constitutes entertainment, how it can be deductible in your business, and the important rules you need to know to make the most of your deductions.
What Are Entertainment Expenses?
Entertainment expenses are business-related expenses incurred while entertaining or taking clients, customers, or employees to events or social activities. They can be anything from buying tickets to a sporting event or concert, paying for meals, lodging, transportation, or recreational activities such as golfing, skiing, or hunting.
However, entertainment expenses are generally not deductible unless they meet specific requirements as explained below.
How Can Entertainment Expenses Be Deductible?
To qualify for entertainment expense deduction, the expenses must be considered ordinary and necessary expenses for your business. That means they must have a clear business purpose and be directly related to the promotion of your business.
The IRS considers entertainment expenses deductible if they meet the following two tests:
1. The Directly-Related Test: The entertainment expenses must be directly related to the active conduct of your business. That means you must have engaged in substantive business discussions before, during, or after the entertainment event. These discussions can include negotiations, discussions on business deals, or discussing the plans to acquire new clients.
2. The Associated-Test: Even if the entertainment event is not directly related to your business, it can still be deductible if it’s associated with your business. That means the entertainment event must occur immediately before or after a substantial business discussion. It’s up to you to prove that the entertainment event was associated with a substantial business purpose.
What Are the Important Rules You Need to Know?
It’s essential to keep accurate records and all supporting documentation for your entertainment expenses. You should document the following details:
1. Date, time, and location of the entertainment
2. Who was in attendance and their business relationship to you
3. The amount of the expense and the method of payment
4. The business relationship to the entertainment event
Additionally, there are several limitations you should keep in mind when claiming entertainment expenses. In general, you can claim up to 50% of the total expense as a deduction. Also, entertainment expenses must be reasonable and necessary, and lavish or extravagant expenses are not deductible.
Conclusion
In summary, entertainment expenses can be a valuable tool for your business to build and maintain relationships with clients, customers, and employees. However, to take full advantage of this deduction, you need to ensure that your expenses meet the IRS requirements and keep accurate records and supporting documentation.
By following the rules outlined above and planning ahead, you can maximize your entertainment expense deductions and keep your business in good standing with the IRS.
