Can We Write Off the Holiday Party? New and prospective clients ask this question every year about this time, and it’s no wonder. When you consider the tax code goes under revision every year, it’s conceivable that deductions come under scrutiny for businesses and people alike.
Let’s be clear to start. If you have not properly budgeted or can’t afford a holiday party don’t do it (or find a way to do it for less)! You should never make a business decision based only on the potential for a tax deduction as the most important thing for your business is to manage cash flows and have the cash available to help generate a return on your investment.
That said, let’s consider the holiday party for employees and their spouse, or significant other. The rule of thumb is that because a celebration of this type is a part of a traditional element of business, it is a deductible expense. Employee holiday parties are typically 100% tax deductible if the benefit is provided for the entertainment of your employees. However, our government has made a habit of providing caveats and exemptions for just about every law on the books, and the topic of entertainment and employee meals is no different.
A holiday party where friends of the business owners are invited to the same holiday party, the directly-related expense guideline does not apply. The pro-rata portion of the holiday party spending that was enjoyed by the employees would be 100% deductible, but the friend’s part would not be. As for customers and potential customers, similar rules would apply. Because no “significant business” was conducted (a two-minute speech thanking them for a good year doesn’t meet the hurdle), a business entertainment deduction would not be justified.
For example, 50 employees, 50 customers, and 50 friends attend your party. The party costs $1,500. You will be allowed to write off $750 – $500 (100% deduction) for employees, $250 (50% deduction) for customers and zero for your buddies.2 Fox Business.com
Entertainment has long been considered a cost of doing business. In many instances, it is the way business is gained, by conducting significant business during the meal, event, excursion and so forth. However, merely entertaining for the sake of goodwill is not a valid deduction.
From one perspective, entertainment is valid, yet based on circumstance, not allowable as a business deduction. Knowing that, consider the “significant business” qualifier. If there is a formal presentation, demonstration of a new whiz-bang and hands-on knowledge share, it’s 100% valid. Holding a party for your employees with no business conducted is still a logical decision. Just remember to keep good records of those who attended, the purpose, cost-breakdowns if a mixed group, and be able to defend your logic in the case of an audit. If invitations were created, keep a copy in the file along with the guest list. For business attendees, make sure to notate the business relationship.
According to the IRS, an expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Yes, that means that what may be reasonable for Google or Yahoo might not be reasonable for your own company; spending for the event should be consistent with the type and level of company or firm.3 Forbes- Kelly Phillips Erb
Here’s a note for solo-preneurs (one person businesses)
Our friends in government can find a way to dampen the holiday spirit, even though a full deduction is allowable for a company’s employees. The exception is, however, that a one-person company cannot party alone, or with family members and make it tax deductible. This rule is known as the Attribution Ownership – Definition of Disqualifying Persons5. These rules are based on percentage of ownership, stock holdings, voting rights. The spouse and children of the disqualifying person also constitute disqualification as well.
What other employee related costs are eligible for a complete deduction
While we’re discussing the holiday party, it makes sense to highlight some of the other employee perks that can be 100% tax deductible.
- The summer company picnic, where the employee’s family is invited, including food, beverages, games, toys for the children is another fully deductible expense because it is for the benefit of employees.
- Office or workplace snacks, coffee, tea, juice, soft drinks, donuts, nuts, crackers and fresh fruit are great to provide for morale and good health and are generally deductible.
- Recreation and fitness equipment for the benefit of employee wellness are all fully deductible.
- If employees are requested to work late-night, weekends or holidays, meals are generally deductible (as long as the work and meals are for the benefit of the employer).
These are merely some of the employee related expenses that can qualify for 100% tax deductibility. Just make sure to confirm with your tax professional in your business community.
What about other types of entertainment deduction questions? There is often a lot of consternation regarding entertainment write-offs, and rightly so. The rules and exemptions can be quite confusing, but that is a discussion worthy of its own articles. If your concerns are suited to this tax reporting year, it’s best to contact your accounting advisor or us immediately.
Conclusion: Can We Write Off the Holiday Party?
Rewarding employees at the end of the year with a celebration is a grand gesture, provided it is reasonable. Uncle Sam’s tax collectors don’t take kindly to abusing the system. Extravagant or excessive celebrations beyond what would be considered “normal” for your type of business will raise red flags and possibly a much deeper inspection of your financials6. Flying into Aspen for a weekend celebration with food and beverage from five-star hotels and Las Vegas stage acts likely doesn’t fit with a hardware store’s “standard.” You get it, make things reasonable and fun, but not outlandish, and you’ll be okay.
We at Bond Andiola are a CPA firm and are licensed to provide advice on tax issues, small business growth, and business process improvement. However, this blog should be considered a guideline and not the final word on your individual circumstances. Contact our offices for a consultation about your upcoming holiday gatherings.
If you’d like to hear what we recommend to be a reasonable budget for your particular business, just pick up the phone, and we’ll schedule a meeting to discuss this or any topic that comes to mind. We’re here for your future.