Defining Meals and Entertainment

What kind of expenses constitute deductible meal and entertainment expenses, for which a 50 percent deduction is allowed? Generally, expenses for any activity considered to provide entertainment, amusement, or recreation fall into this category.

For example, entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; or on hunting, fishing, vacation and similar types of trips constitutes entertainment. Meeting personal, living, or family needs of individuals, (for example, providing meals, a hotel suite, or a car to business customers or their families), can be an entertainment expense as well.

Entertainment expenses include the cost of meals you provide to customers or clients, whether the meal alone is the entertainment or it's a part of other entertainment (for example, refreshments at a football game). A meal expense includes the cost of food, beverages, taxes, and tips. Meals for employees are deductible under a different set of rules.

You can also deduct 50 percent of business meals or entertainment expenses incurred while:

• entertaining business guests, whether it's at your place of business, a restaurant, or some other place
• attending a business convention, reception, meeting, or luncheon at a club
• traveling away from home on business, whether eating alone or with others on business.

It's important to note that the type of business you run can determine whether an activity is entertainment.

Example If you're a freelance theater critic who is paid for your reviews, and you attend a theatrical performance in your professional capacity, this is not a 50 percent deductible entertainment expense; instead, it would be a 100 percent deductible business expense. Similarly, if a clothing designer puts on a fashion show to show his designs to a group of store buyers, it would not be considered entertainment. However, if you are an appliance distributor and you put on a fashion show for your retailers, the show is considered entertainment and only 50 percent would be deductible.

Tickets to entertainment events. The cost of entertainment tickets is generally deductible. However, you can only deduct the face value of the ticket even if you paid a higher price (for example, if you pay more than face value for a ticket from a scalper, ticket agency, or ticket broker).

You can, however, take the full cost you pay for a ticket into account, even if it's higher than face value, when the ticket or package deal is to a sporting event, if the event's main purpose is to benefit a qualified charitable organization, the entire net proceeds go to the charity, and the event uses volunteers to perform substantially all of the event's work. Also, the 50 percent limitation on entertainment expenses doesn't apply to any expense that is a means of advertising or promoting goodwill in the community.

If you do not attend an entertainment event yourself, you can choose whether to treat the tickets as a business gift (full cost deductible up to $25) or as entertainment (only 50 percent deductible).

Spouses. Can you deduct the cost of entertainment for your spouse or a customer or client's spouse? You can only deduct these costs if you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. For example, you would be able to deduct otherwise permissible entertainment expenses of an out-of-town client's husband when it is impracticable to entertain the client for business purposes without him.