What Entertainment Expenses Are Deductible? This section explains different types of entertainment expensesthat you may be able to deduct. Entertainment.Entertainment includes any activity generally considered to provideentertainment, amusement, or recreation. Examples include entertainingguests at nightclubs; at social, athletic, and sporting clubs; attheaters; at sporting events; on yachts; or on hunting, fishing,vacation, and similar trips. Entertainment also may include meeting personal, living, or familyneeds of individuals, such as providing meals, a hotel suite, or a carto customers or their families. A meal as a form of entertainment.Entertainment includes the cost of a meal you provide to a customeror client, whether the meal is a part of other entertainment or byitself. A meal expense includes the cost of food, beverages, taxes,and tips for the meal. To deduct an entertainment-related meal, you oryour employee must be present when the food or beverages are provided. Caution: You cannot claim the cost of your meal both as an entertainmentexpense and as a travel expense. TaxTip: Meals sold in the normal course of your business are not consideredentertainment. Deduction may depend on your type of business.Your kind of business may determine if a particular activity isconsidered entertainment. For example, if you are a dress designer andhave a fashion show to introduce your new designs to store buyers, theshow generally is not considered entertainment. This is becausefashion shows are typical in your business. But, if you are anappliance distributor and hold a fashion show for the spouses of yourretailers, the show generally is considered entertainment. Taking turns paying for meals or entertainment.Expenses are not deductible when a group of businessacquaintances take turns picking up each others' meal or entertainmentchecks without regard to whether any business purposes are served. Lavish or extravagant expenses.You cannot deduct expenses for entertainment that are lavish orextravagant. An expense is not considered lavish or extravagant if itis reasonable considering the facts and circumstances. Expenses willnot be disallowed just because they are more than a fixed dollaramount or take place at deluxe restaurants, hotels, nightclubs, orresorts. Allocating between business and nonbusiness.If you entertain business and nonbusiness individuals at the sameevent, you must divide your entertainment expenses between businessand nonbusiness. You can deduct only the business part. If you cannotestablish the part of the expense for each person participating,allocate the expense to each participant on a pro rata basis. Example.You entertain a group of individuals that includes yourself, threebusiness prospects, and seven social guests. Only 4/11 ofthe expense qualifies as a business entertainment expense. You cannotdeduct the expenses for the seven social guests because those costsare nonbusiness expenses. Trade association meetings.You can deduct entertainment expenses that are directly related toand necessary for attending business meetings or conventions ofcertain exempt organizations. These organizations include businessleagues, chambers of commerce, real estate boards, trade associations,and professional associations. The expenses of your attendance must berelated to your active trade or business. These expenses are subjectto the 50% limit on entertainment expenses. Entertainment tickets.Generally, you cannot deduct more than the face value of anentertainment ticket, even if you paid a higher price. For example,you cannot deduct service fees you pay to ticket agencies or brokersor any amount over the face value of the tickets you pay to scalpers. Exception for events that benefit charitable organizations.Different rules apply when the cost of a ticket to a sports eventbenefits a charitable organization. You can take into account the fullcost you pay for the ticket, even if it is more than the face value,if all of the following conditions apply. The event's main purpose is to benefit a qualifiedcharitable organization. The entire net proceeds go to the charity. The event uses volunteers to perform substantially all theevent's work. TaxTip: The 50% limit on entertainment does not apply to any expense for apackage deal that includes a ticket to such a charitable sports event. Example 1.You purchase tickets to a golf tournament organized by the localvolunteer fire company. All net proceeds will be used to buy new fireequipment. The volunteers will run the tournament. You can deduct theentire cost of the tickets as a business expense if they otherwisequalify as an entertainment expense. Example 2.You purchase tickets to a college football game through a ticketbroker. After having a business discussion, you take a client to thegame. Net proceeds from the game go to colleges that qualify ascharitable organizations. However, since the colleges also payindividuals to perform services, such as coaching and recruiting, youcan only use the face value of the tickets in determining yourbusiness deduction. Also, your deduction is subject to the 50% limit. Table 2. When Are Entertainment Expenses Deductible? Skyboxes and other private luxury boxes.If you rent a skybox or other private luxury box for more than oneevent at the same sports arena, you generally cannot deduct more thanthe price of a nonluxury box seat ticket. To determine whether a skybox has been rented for more than oneevent, count each game or other performance as one event. For example,renting a skybox for a series of playoff games is considered rentingit for more than one event. All skyboxes you rent in the same arena,along with any rentals by related parties, are considered in makingthis determination. luxury hotels in YorkRelated parties include: rooms StrasbourgFamily members (spouses, ancestors, and linealdescendants), Parties who have made a reciprocal arrangement involving thesharing of skyboxes, Related corporations, A partnership and its principal partners, and A corporation and a partnership with commonownership. Example.You pay $3,000 to rent a 10-seat skybox at Team Stadium for threebaseball games. The cost of regular nonluxury box seats at each eventis $20 a seat. You can deduct (subject to the 50% limit) $600[(10 seats $20 each) 3 events]. Food and beverages in skybox seats.If expenses for food and beverages are separately stated, you candeduct these expenses in addition to the amounts allowable for theskybox, subject to the requirements and limits that apply. The amountsseparately stated for food and beverages must be reasonable. Youcannot inflate the charges for food and beverages to avoid the limiteddeduction for skybox rentals. 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 entertainmentwas the active conduct of business, You did engage in business with the person during theentertainment period, and You had more than a general expectation of getting income orsome other specific business benefit at some future time. Business is generally not considered to be the main purpose whenbusiness and entertainment are combined on hunting or fishing trips,or on yachts or other pleasure boats. Even if you show that businesswas the main purpose, you generally cannot deduct the expenses for theuse of an entertainment facility. See Entertainment facilitiesearlier in this chapter. You must consider all the facts, including the nature of thebusiness transacted and the reasons for conducting business during theentertainment. It is not necessary to devote more time to businessthan to entertainment. However, if the business discussion is onlyincidental to the entertainment, the entertainment expenses do notmeet the directly-related test. TaxTip: You do not have to show that business income or other businessbenefit actually resulted from each entertainment expense. Clear business setting.If the entertainment takes place in a clear business setting and isfor your business or work, the expenses are considered directlyrelated to your business or work. The following situations areexamples of entertainment in a clear business setting. Entertainment in a hospitality room at a convention wherebusiness goodwill is created through the display or discussion ofbusiness products. Entertainment that is mainly a price rebate on the sale ofyour products (such as a restaurant owner providing an occasional freemeal to a loyal customer). Entertainment of a clear business nature occurring undercircumstances where there is no meaningful personal or socialrelationship between you and the persons entertained. An example isentertainment of business and civic leaders at the opening of a newhotel or play when the purpose is to get business publicity ratherthan to create or maintain the goodwill of the personsentertained. Expenses not considered directly related.Entertainment expenses generally are not considered directlyrelated if you are not there or in situations where there aresubstantial distractions that generally prevent you from activelyconducting business. The following are examples of situations wherethere are substantial distractions. A meeting or discussion at a nightclub, theater, or sportingevent. A meeting or discussion during what is essentially a socialgathering, such as a cocktail party. A meeting with a group that includes persons who are notbusiness associates at places such as cocktail lounges, country clubs,golf clubs, athletic clubs, or vacation resorts. Associated Test Even if your expenses do not meet the directly-related test, theymay meet the associated test. To meet the associated test for entertainment expenses (includingentertainment-related meals), you must show that the entertainment: Is associated with your trade or business, and Directly precedes or follows a substantial businessdiscussion (defined later). Generally, any ordinary and necessary expense is associated withthe active conduct of your trade or business if you can show that youhad a clear business purpose for having the expense. The purpose maybe to get new business or to encourage the continuation of an existingbusiness relationship. Substantial business discussion.Whether a business discussion is substantial depends on the factsof each case. A business discussion will not be considered substantialunless you can show that you actively engaged in the discussion,meeting, negotiation, or other business transaction to get income orsome other specific business benefit. The meeting does not have to be for any specified length of time,but you must show that the business discussion was substantial inrelation to the meal or entertainment. It is not necessary that youdevote more time to business than to entertainment. You do not have todiscuss business during the meal or entertainment. Meetings at conventions.You are considered to have a substantial business discussion if youattend meetings at a convention or similar event, or at a trade orbusiness meeting sponsored and conducted by a business or professionalorganization. However, your reason for attending the convention ormeeting must be to further your trade or business. The organizationthat sponsors the convention or meeting must schedule a program ofbusiness activities that is the main activity of the convention ormeeting. Directly before or after business discussion.If the entertainment is held on the same day as the businessdiscussion, it is considered to be held directly before or after thebusiness discussion. If the entertainment and the business discussion are not held onthe same day, you must consider the facts of each case to see if theassociated test is met. Among the facts to consider are the place,date, and duration of the business discussion. If you or your businessassociates are from out of town, you must also consider the dates ofarrival and departure, and the reasons the entertainment and thediscussion did not take place on the same day. Example.A group of business associates comes from out of town to your placeof business to hold a substantial business discussion. If youentertain those business guests on the evening before the businessdiscussion, or on the evening of the day following the businessdiscussion, the entertainment generally is considered to be helddirectly before or after the discussion. The expense meets theassociated test. Expenses for spouses.You generally cannot deduct the cost of entertainment for yourspouse or for the spouse of a customer. However, you can deduct thesecosts if you can show that you had a clear business purpose, ratherthan a personal or social purpose, for providing the entertainment. Example.You entertain a customer. The cost is an ordinary and necessarybusiness expense and is allowed under the entertainment rules. Thecustomer's spouse joins you because it is impractical to entertain thecustomer without the spouse. You can deduct the cost of entertainingthe customer's spouse as an ordinary and necessary business expense.If your spouse joins the party because the customer's spouse ispresent, the cost of the entertainment for your spouse is also anordinary and necessary business expense. 50% Limit hotels in AlicanteIn general, you can deduct only 50% of your business-related mealand entertainment expenses. (If you are subject to the Department ofTransportation's "hours of service" limits, you can deduct ahigher percentage. See Individuals subject to "hours of service"limits, later.) The 50% limit applies to employees or theiremployers, and to self-employed persons (including independentcontractors) or their clients, depending on whether the expenses arereimbursed. Figure A summarizes the general rules explainedin this section. The 50% limit applies to business meals or entertainment expensesyou have while: Traveling away from home (whether eating alone or withothers) on business, Entertaining customers at your place of business, arestaurant, or other location, or Attending a business convention or reception, businessmeeting, or business luncheon at a club. Covered expenses.Taxes and tips relating to a business meal or entertainmentactivity are included in the amount that is subject to the 50% limit.Expenses such as cover charges for admission to a nightclub, rent paidfor a room in which you hold a dinner or cocktail party, or the amountpaid for parking at a sports arena are subject to the 50% limit.However, the cost of transportation to and from a business meal or abusiness-related entertainment activity is not subject to the 50%limit. Separating costs.If you have an expense for goods and services consisting of meals,entertainment, and other services (such as lodging or transportation),you must allocate that expense between the cost of meals andentertainment and the cost of the other services. You must have areasonable basis for making this allocation. For example, you mustallocate your expenses if a hotel includes one or more meals in itsroom charge, or if you are provided with one per diem amount to coverboth your lodging and meal expenses. Application of 50% limit.The 50% limit on meal and entertainment expenses applies if theexpense is otherwise deductible and is not covered by one of theexceptions discussed later. The 50% limit also applies to activities that are not a trade orbusiness. It applies to meal and entertainment expenses you have forthe production of income, including rental or royalty income. It alsoapplies to the cost of meals included in deductible educationalexpenses. When to apply the 50% limit.You apply the 50% limit after determining the amount that wouldotherwise qualify for a deduction. You first have to determine theamount of meal and entertainment expenses that would be deductibleunder the other rules discussed in this publication. Example 1.You spend $100 for a business-related meal. If $40 of that amountis not allowable because it is lavish and extravagant, the remaining$60 is subject to the 50% limit. Your deduction cannot be more than$30 (.50 $60). Example 2.You purchase two tickets to a concert and give them to a client.You purchased the tickets through a ticket agent. You paid $150 forthe two tickets, which had a face value of $60 each ($120 total). Yourdeduction cannot be more than $60 (.50 $120). Figure A. Does the 50% limit apply to Your Expenses? Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses aresubject to the 50% limit. Figure A can help you determineif the 50% limit applies to you. Your meal or entertainment expense is not subject to the50% limit if the expense meets one of the following exceptions. 1 - Employee's reimbursed expenses.If you are an employee, you are not subject to the 50% limit onexpenses for which your employer reimburses you under an accountableplan. Accountable plans are discussed in chapter 6. 2 - Self-employed.If you are self-employed, your deductible meal and entertainmentexpenses are not subject to the 50% limit if all three ofthe following requirements are met. You have these expenses as an independent contractor. Your customer or client reimburses you or gives you anallowance for these expenses in connection with services youperform. ERROR MSGYou provide adequate records of these expenses to yourcustomer or client. (See chapter 5.) In this case, your client or customer is subject to the 50% limiton the expenses. Example.You are a self-employed attorney who adequately accounts for mealand entertainment expenses to a client who reimburses you for theseexpenses. You are not subject to the directly-related or associatedtest, nor are you subject to the 50% limit. If the client can deductthe expenses, the client is subject to the 50% limit. If you (the contractor) have expenses for meals and entertainmentrelated to providing services for a client but do not adequatelyaccount for and seek reimbursement from the client for those expenses,you are subject to the directly-related or associated test and to the50% limit. 3 - Advertising expenses.You are not subject to the 50% limit if you provide meals,entertainment, or recreational facilities to the general public as ameans of advertising or promoting goodwill in the community. Forexample, the expense of sponsoring a television or radio show isdeductible, as is the expense of distributing free food and beveragesto the general public. 4 - Sale of meals or entertainment.You are not subject to the 50% limit if you actually sell meals,entertainment, goods and services, or use of facilities to the public.For example, if you run a nightclub, your expense for theentertainment you furnish to your customers, such as a floor show, isa business expense. 5 - Charitable sports event.You are not subject to the 50% limit if you pay for a package dealthat includes a ticket to a qualified charitable sports event. For theconditions the sports event must meet, see Exception for eventsthat benefit charitable organizations under Entertainmenttickets, earlier. Individuals subject to "hours of service" limits.You can deduct a higher percentage of your meal expenses if themeals take place during or incident to any period subject to theDepartment of Transportation's "hours of service" limits. Thepercentage is 55% for 1999, and it gradually increases to 80% by theyear 2008. Individuals subject to the Department of Transportation's "hoursof service" limits include the following persons. Certain air transportation workers (such as pilots, crew,dispatchers, mechanics, and control tower operators) who are underFederal Aviation Administration regulations. Interstate truck operators and bus drivers who are underDepartment of Transportation regulations. Certain railroad employees (such as engineers, conductors,train crews, dispatchers, and control operations personnel) who areunder Federal Railroad Administration regulations. Certain merchant mariners who are under Coast Guardregulations.