En­ter­tain­ment expenses for ac­count­ing and taxes

In almost every business there comes a time when those within the company ask them­selves how to file business en­ter­tain­ment expenses. Re­gard­less of whether you’re a huge multi­na­tion­al, a small company, or a free­lancer, business meals are often a very important aspect of the general business ac­tiv­i­ties. Occasions like this allow you to get together with customers, business partners, and even suppliers. It is here where re­la­tion­ships are fostered, new projects are started, and contracts are ne­go­ti­at­ed. And all this costs money – money which is tax de­ductible.

Usually, it is 50% of the overall bill that is tax de­ductible, but in some cases it can be as much as 100%, e.g. in the following sit­u­a­tions:

• Meals that are provided for a company picnic or holiday party
• Any food or beverage provided to employees on the business premises (i.e. office snacks)
• Food made available to the public for free (i.e. an open house, exhibit or any other “pro­mo­tion­al campaign”).
• Meals provided to more than half your employees for the con­ve­nience of the employer. This trans­lates to providing meals to employees as an incentive to keep them working overtime or being on-call.

Of course, it goes without saying that in order to do this you need to have the correct documents and paperwork. However this is not the only reason that en­ter­tain­ment expense receipts are important. Every business, small or large, can be chosen for a tax audit. If on such an occasion, it turns out that business meals and other en­ter­tain­ment expenses have not been recorded correctly and cannot be backed up with the relevant receipts, then this can lead to serious problems with the tax au­thor­i­ties. In this article we have sum­ma­rized the most important in­for­ma­tion relating to en­ter­tain­ment expenses.

An expense receipt is a document con­tain­ing details on hos­pi­tal­i­ty expenses that have been carried out for business purposes, e.g. a business meal. Tech­ni­cal­ly speaking, en­ter­tain­ment expense receipts belong under the category of sup­port­ing documents, which are normally provided by an external party, in this case, the restau­rant. Tips and service charges are also subjected to this 50% rate, as are the fees for hiring a room and any parking charges. If you wish to fully comply with ac­count­ing and tax standards then it is im­per­a­tive that you are in pos­ses­sion of all the correct expense receipts and paperwork. According to IRS Pub­li­ca­tion 463 there are two different methods for assessing whether a meal and en­ter­tain­ment expense is business-related: the directly related test and as­so­ci­at­ed test. Directly related means that the main purpose of the en­ter­tain­ment was to actively conduct business, which you then engaged in during the course of the event, and that you had an ex­pec­ta­tion of gaining future income or another business specific benefit as a result of the en­ter­tain­ment. In other words, the main purpose of the en­ter­tain­ment was the active conduct of business. There is also the option of the as­so­ci­at­ed test, wherein there were still clear business purposes for or­ga­niz­ing the event, or that the event took place im­me­di­ate­ly before or after a sub­stan­tial business-related dis­cus­sion. Sub­stan­tial, in this case, means that it involved dis­cus­sion on a business trans­ac­tion or some other activity that is specific to your company. The IRS does not specify how long such a meeting needs to be and also makes sure to point out that it is not necessary for business to be discussed during the meal or en­ter­tain­ment. As mentioned above, along with food and transport, things like tips, coat check, as well as cover charges for admission into a nightclub can also be de­ductible along with en­ter­tain­ment expense receipts. However travel and overnight costs are not included – although it may be worth bearing in mind that these could be subject to the De­part­ment of Transport’s “hours of service” leg­is­la­tion. Of course, if it is the case that you are hosting guests in your office space then coffee and snacks, etc. are also tax de­ductible.

When filing such an en­ter­tain­ment expense, it is also crucial that you dif­fer­en­ti­ate between a client event and one organized for employees. Take the example of a party: if it is just for you and your employees then there is a good chance that it will be fully tax de­ductible. But if you go another step further and invite clients to the event, then in order to benefit from en­ter­tain­ment expense de­duc­tions, you will need to prove that the main reason for having the event was, as outlined above, to conduct business, foster client re­la­tion­ships, etc. In this case you will be entitled to claim back 50% of the clients’ mean and en­ter­tain­ment expenses. But bear in mind that once someone who is not an employee is present, then you will need to be very careful and exercise extreme caution.

Another very important dif­fer­ence when it comes to business en­ter­tain­ment expenses is the amount of the bill. The crucial number is $75. If the cost of the meal, etc. is more than $75 then it is necessary to have doc­u­men­tary evidence, i.e. a receipt, voucher, or copy of a bank statement (if you used a credit card). En­ter­tain­ment expenses that cost less than $75 do not legally require the receipts to be saved and the amount can simply be added to the total sum of business meals in the yearly or quarterly accounts. However it is still rec­om­mend­able that you hang onto all receipts, no matter what the final sum is. This will make your life much easier if you do happen to be subject to a tax audit.

If it is the case that the expense receipt does indeed exceed $75 then a simple receipt from the restau­rant, bar, etc., is not suf­fi­cient as doc­u­men­tary evidence for the event. Your paperwork should include all of the following:

• Name, location of the restau­rant, date, and amount (if not printed on the receipt)
• Number of people served
• Receipt must show any other items besides food and beverages if purchased
• Purpose of the meal or en­ter­tain­ment

When filing business en­ter­tain­ment expenses there are a couple more things to take note of:

• The receipt should always be printed – hand­writ­ten receipts and con­fir­ma­tions should generally be avoided.
• If you are unsure whether the expense receipt is enough then you may want to make sure you archive ad­di­tion­al proof that the event took place. This might include emails that were sent to par­tic­i­pants or even the itinerary for the day of the event.
• In principle, the occasion and as­so­ci­at­ed costs should be roughly in pro­por­tion to one another. This means that costs should not be too excessive so that the auditor sees the amount spent as rea­son­able.
• It is always rec­om­mend­able that you sign each expense receipt.

As outlined above, tips are also a very important part of business meals and en­ter­tain­ment expenses, and, therefore, should not be forgotten when it comes to the expense receipt. If you are a business that often en­ter­tains clients, then the money spent on tips can really begin to add up. It can often happen that the bill is paid with credit card and then the tip in cash. In this case, it is possible to write up a sup­port­ing document to take care of this ad­di­tion­al aspect. It’s a good idea to write the amount of the tip on the receipt and get the server in question to sign it, ensuring as well that the server’s name is also on the receipt.

Click here for important legal dis­claimers.