What is new for the Business Entertainment Deduction?

Business Entertainment ExpenseEffective January 1, 2018, entertainment expenses are no longer deductible. Entertainment expenses include those costs connected with activities that constitute entertainment, amusement or recreation.

What is Entertainment?

When categorizing what constitutes entertainment, an objective test shall be used to determine whether an activity is of a type generally incurred conducting your trade or business. Evaluating the results of the expense does not re-characterize the expense as advertising, marketing or public relations. While such expenses provide networking and business development opportunities, they remain entertainment expenses not advertising, marketing or public relations expenses.

As an example, nightclub cover charges, theatre or excursion tickets would be considered entertainment expenses because, by their inherent qualities, they provide entertainment, therefore non-deductible. However, as a professional critic visiting such facilities or attending events that you will critique in a professional capacity are part of your trade or business, and would be ordinary and necessary business expenses.

How to determine what is an entertainment expense?

As a business owner, the best strategy is to evaluate where and how you spend your business development and customer relations dollars. Defining the outcome you want: such as converting a potential customer into a current customer or strengthening a current customer relationship. Determining the action that they will most value with a mutually beneficial result may result in a higher return on your investment of time and money. Based on your situation, these will vary.

Another option for business owners, who want to acknowledge or show appreciation to potential or current customers, is providing business gifts. The maximum deductible business gift is $25 per person per tax year. Therefore, purchasing goods as a business gift for more than $25 would result in a non-deductible portion of that purchase.

If you would like to discuss how the changes in the business entertainment deduction applies to you and your business activity, do not hesitate to contact me.

Learn about the business meal deduction.

Learn about the qualified business income deduction.

Learn about year end tax planning.

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