Company events such as work parties, company pre­sen­ta­tions, an­niver­sary cel­e­bra­tions, and company lunches all have this one thing in common: They need to be well organized. In addition to sched­ul­ing, sending out in­vi­ta­tions, designing the program, and procuring catering for the par­tic­i­pants all play an important role. Neither employees nor business as­so­ciates should leave feeling hungry or un­sat­is­fied with the menu choices.

But in the endeavor to offer all employees and guests a wide selection of del­i­ca­cies, it’s important to not lose sight of the cost factor. For this, it helps to make sure that all meal and en­ter­tain­ment expenses are entered correctly into your books and credited correctly in your tax returns. This guide will advise you on how to proceed and what to look out for.

The first step: An ap­pro­pri­ate ac­count­ing system

To be able to properly organize your business events, you first need a proper ac­count­ing system. This is a pre­req­ui­site for the creation of a detailed and in­di­vid­u­al­ized account plan that includes all of your company accounts. It’s an integral part of the double-entry book­keep­ing system.

Note

The ac­count­ing system is only the foun­da­tion of your book­keep­ing plan. In order to customize it, you still need the necessary know-how. As the software doesn’t provide a full support system, it may be necessary to hire a third-party expert ac­coun­tant to fully utilize the ac­count­ing software.

How to properly record business en­ter­tain­ment expenses

Before you start recording your business en­ter­tain­ment expenses and their cor­re­spond­ing tax de­duc­tions, you must be aware that the IRS will only allow de­duc­tions for 50% of meal and en­ter­tain­ment expenses. These expenses have to meet the guide­lines presented by the IRS and be both “ordinary and necessary” according to one of these two tests:

  • The directly-related test shows that the main purpose of the activity was business, i.e. took place in a setting that was clearly business-related and had more than a passing con­nec­tion with gen­er­at­ing income or future business as a result of the activity. Meeting clients for lunch in your office would be an example of meal expenses that would meet the “directly related” re­quire­ments.

     
  • The as­so­ci­at­ed test applies if the expense is as­so­ci­at­ed with a “sub­stan­tial business dis­cus­sion” or actively con­duct­ing business. This means expenses with the purpose of acquiring new business and en­cour­ag­ing the con­tin­u­a­tion of an existing re­la­tion­ship. It’s not necessary for business to be discussed during the activity for it to count as sub­stan­tial. An example would be en­ter­tain­ing business guests at a nightclub the night before a business dis­cus­sion. This could qualify for the as­so­ci­at­ed test.

Recording expenses ac­cu­rate­ly and in full will help determine which expenses are included in the 50% limit and where your tax de­duc­tions apply.

Where to display expenses on your tax return

Depending on which expenses you’re trying to deduct or what kind of business you run, business en­ter­tain­ment expenses will be listed in a number of places. Topic 512 in the IRS outlines which forms will need to be filled out in different cir­cum­stances, and Pub­li­ca­tion 463 goes into more detail on what qualifies as a de­ductible expense and what doesn’t.

As an employer, there is no need to include re­im­burse­ment in W2 forms for employees with sub­stan­ti­at­ed and re­im­bursed expenses on an ac­count­able plan. If the re­im­burse­ments exceed the ac­count­able plan, if they were included on a non-ac­count­able plan, or if they don’t exist at all, then either Form 2106 or Form 2106-EZ is used to deduct en­ter­tain­ment expenses. Some expenses may also qualify as Itemized De­duc­tions, which are entered on Form 1040, Schedule A and adjusted according to Topic 508. Expenses for self-employed persons or farmers can be filed using forms 1040 Schedule C, 1040 Schedule C-EZ, or 1040 Schedule F. Cor­po­ra­tions refer to the “De­duc­tions” section of Form 1065 for recording expenses.

Note

Re­gard­less of the source of the expense, you’ll only be able to properly claim tax de­duc­tions if you can prove they occurred in the ap­pro­pri­ate form and with valid records. The IRS will only ac­knowl­edge the validity of de­duc­tions that are submitted along with the ap­pro­pri­ate doc­u­men­ta­tion.

Please note the legal dis­claimer relating to this article.

Reviewer

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