Some rules of thumb for deducting entertainment expenses:
- The entertainment can be deducted if it is either directly related to or associated with your business.
- Expenses must be ordinary and necessary for your line of work. Lavish expenses won't hold up.
- You can only write off 50 percent of meals and entertainment
- Golf and country club memberships are no longer an allowable deduction.
Action Steps
The best contacts and resources to help you get it done
Keep good records
Hold on to all receipts, note who was there and what was discussed. For meals under $75, receipts aren't necessary, but you still need to have a note of the who, what, where, when and how much.I recommend: You can go old school with a notebook or binder, but there is software to help you keep track of all the data. Iambic offers a product called Standard Time that you can download to your Palm Pilot to track entertainment expenses and client names. It integrates with QuickBooks and other financial software.
Set limits for your team
It's hard enough to manage your own entertainment expenses, but you need to make sure your employees also understand what's deductible and what the limits are.I recommend: ExpenseWatch offers a travel and entertainment module allowing you to control and analyze your staff's entertainment spending and easily enforce spending limits.
Know if you're running up a red flag
When reviewing claimed expenses, the IRS classifies businesses by codes from the NAICS (North American Industry Classification System) based on income, then looks at national averages for each code.I recommend: Find out your code and see what the range is for your particular income level. If you are within the range, the IRS will probably not come knocking.
Tips & Tactics
Helpful advice for making the most of this Guide
- If your client brings along a spouse, you can bring yours, too, and deduct the cost as an entertainment expense.
- You can deduct entertaining you do in your home if guests are clients or employees. You may not deduct the portion of the party costs for friends or family.
- The IRS may flag your expenses if it sees you consistently taking the same person out to lunch. Entertainment expenses are supposed to be about business development.
- The IRS has three years to decide whether to audit you. Just because you received your refund or paid your bill for the year, doesn't mean you're in the clear.
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