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taxmap/pubs/p463-004.htm#TXMP23225e73 Chapter 2 Entertainment(p9)

Meals and Entertainment

You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. The rules and definitions are summarized in Table 2-1.

You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests.

• Directly-related test.
• Associated test.

Both of these tests are explained later.

An ordinary expense is one that is common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.

The amount you can deduct for entertainment expenses may be limited. Generally, you can deduct only 50% of your unreimbursed entertainment expenses. This limit is discussed later under 50% Limit.

taxmap/pubs/p463-004.htm#TXMP6f7a0b04 Directly-Related Test(p9)

Directly-Related Test

To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that:

• The main purpose of the combined business and entertainment was the active conduct of business,
• You did engage in business with the person during the entertainment period, and
• You had more than a general expectation of getting income or some other specific business benefit at some future time.

Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter.

You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. It is not necessary to devote more time to business than to entertainment. However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test.

You do not have to show that business income or other business benefit actually resulted from each entertainment expense.

taxmap/pubs/p463-004.htm#TXMP3e5f7b0b Clear business setting.(p10)

If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. The following situations are examples of entertainment in a clear business setting.

• Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products.
• Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional free meal to a loyal customer).
• Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. An example is entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained.

taxmap/pubs/p463-004.htm#TXMP55124207 Expenses not considered directly related.(p10)

Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. The following are examples of situations where there are substantial distractions.

• A meeting or discussion at a nightclub, theater, or sporting event.
• A meeting or discussion during what is essentially a social gathering, such as a cocktail party.
• A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts.

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