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Free state filing online 2. Free state filing online   Entertainment Table of Contents Directly-Related Test Associated TestMeetings at conventions. Free state filing online 50% LimitExceptions to the 50% Limit What Entertainment Expenses Are Deductible?A meal as a form of entertainment. Free state filing online Deduction may depend on your type of business. Free state filing online Exception for events that benefit charitable organizations. Free state filing online Food and beverages in skybox seats. Free state filing online What Entertainment Expenses Are Not Deductible?Out-of-pocket expenses. Free state filing online You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. Free state filing online The rules and definitions are summarized in Table 2-1 . Free state filing online You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. Free state filing online Directly-related test. Free state filing online Associated test. Free state filing online Both of these tests are explained later. Free state filing online An ordinary expense is one that is common and accepted in your trade or business. Free state filing online A necessary expense is one that is helpful and appropriate for your business. Free state filing online An expense does not have to be required to be considered necessary. Free state filing online The amount you can deduct for entertainment expenses may be limited. Free state filing online Generally, you can deduct only 50% of your unreimbursed entertainment expenses. Free state filing online This limit is discussed later under 50% Limit. Free state filing online 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. Free state filing online 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. Free state filing online Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. Free state filing online See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter. Free state filing online You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. Free state filing online It is not necessary to devote more time to business than to entertainment. Free state filing online However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. Free state filing online Table 2-1. Free state filing online When Are Entertainment Expenses Deductible? General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. Free state filing online Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Free state filing online An ordinary expense is one that is common and accepted in your trade or business. Free state filing online A necessary expense is one that is helpful and appropriate. Free state filing online Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and 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. Free state filing online   Associated test Entertainment is associated with your trade or business, and Entertainment is directly before or after a substantial business discussion. Free state filing online Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. Free state filing online You cannot deduct expenses that are lavish or extravagant under the circumstances. Free state filing online You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit ). Free state filing online You do not have to show that business income or other business benefit actually resulted from each entertainment expense. Free state filing online Clear business setting. Free state filing online   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. Free state filing online The following situations are examples of entertainment in a clear business setting. Free state filing online Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products. Free state filing online 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). Free state filing online Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. Free state filing online 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. Free state filing online Expenses not considered directly related. Free state filing online   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. Free state filing online The following are examples of situations where there are substantial distractions. Free state filing online A meeting or discussion at a nightclub, theater, or sporting event. Free state filing online A meeting or discussion during what is essentially a social gathering, such as a cocktail party. Free state filing online 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. Free state filing online Associated Test Even if your expenses do not meet the directly-related test, they may meet the associated test. Free state filing online To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: Associated with the active conduct of your trade or business, and Directly before or after a substantial business discussion (defined later). Free state filing online Associated with trade or business. Free state filing online   Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. Free state filing online The purpose may be to get new business or to encourage the continuation of an existing business relationship. Free state filing online Substantial business discussion. Free state filing online   Whether a business discussion is substantial depends on the facts of each case. Free state filing online A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit. Free state filing online   The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. Free state filing online It is not necessary that you devote more time to business than to entertainment. Free state filing online You do not have to discuss business during the meal or entertainment. Free state filing online Meetings at conventions. Free state filing online   You are considered to have a substantial business discussion if you attend meetings at a convention or similar event, or at a trade or business meeting sponsored and conducted by a business or professional organization. Free state filing online However, your reason for attending the convention or meeting must be to further your trade or business. Free state filing online The organization that sponsors the convention or meeting must schedule a program of business activities that is the main activity of the convention or meeting. Free state filing online Directly before or after business discussion. Free state filing online   If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion. Free state filing online   If the entertainment and the business discussion are not held on the same day, you must consider the facts of each case to see if the associated test is met. Free state filing online Among the facts to consider are the place, date, and duration of the business discussion. Free state filing online If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day. Free state filing online Example. Free state filing online A group of business associates comes from out of town to your place of business to hold a substantial business discussion. Free state filing online If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion. Free state filing online The expense meets the associated test. Free state filing online 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. Free state filing online (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. Free state filing online See Individuals subject to “hours of service” limits , later. Free state filing online ) The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. Free state filing online Figure A summarizes the general rules explained in this section. Free state filing online The 50% limit applies to business meals or entertainment expenses you have while: Traveling away from home (whether eating alone or with others) on business, Entertaining customers at your place of business, a restaurant, or other location, or Attending a business convention or reception, business meeting, or business luncheon at a club. Free state filing online Included expenses. Free state filing online   Expenses subject to the 50% limit include: Taxes and tips relating to a business meal or entertainment activity, Cover charges for admission to a nightclub, Rent paid for a room in which you hold a dinner or cocktail party, and Amounts paid for parking at a sports arena. Free state filing online However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit. Free state filing online Figure A. Free state filing online Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. Free state filing online See Exceptions to the 50% Limit . Free state filing online Please click here for the text description of the image. Free state filing online Figure A. Free state filing online Does the 50% limit apply to Your Expenses?TAs for Figure A are: Notice 87-23; Form 2106 instructions Application of 50% limit. Free state filing online   The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later. Free state filing online   The 50% limit also applies to certain meal and entertainment expenses that are not business related. Free state filing online It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. Free state filing online It also applies to the cost of meals included in deductible educational expenses. Free state filing online When to apply the 50% limit. Free state filing online   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. Free state filing online You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this publication. Free state filing online Example 1. Free state filing online You spend $200 for a business-related meal. Free state filing online If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. Free state filing online Your deduction cannot be more than $45 (50% × $90). Free state filing online Example 2. Free state filing online You purchase two tickets to a concert and give them to a client. Free state filing online You purchased the tickets through a ticket agent. Free state filing online You paid $200 for the two tickets, which had a face value of $80 each ($160 total). Free state filing online Your deduction cannot be more than $80 (50% × $160). Free state filing online Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. Free state filing online Figure A can help you determine if the 50% limit applies to you. Free state filing online Expenses not subject to 50% limit. Free state filing online   Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. Free state filing online 1 - Employee's reimbursed expenses. Free state filing online   If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. Free state filing online Accountable plans are discussed in chapter 6. Free state filing online 2 - Self-employed. Free state filing online   If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met. Free state filing online You have these expenses as an independent contractor. Free state filing online Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform. Free state filing online You provide adequate records of these expenses to your customer or client. Free state filing online (See chapter 5 . Free state filing online )   In this case, your client or customer is subject to the 50% limit on the expenses. Free state filing online Example. Free state filing online You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. Free state filing online You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. Free state filing online If the client can deduct the expenses, the client is subject to the 50% limit. Free state filing online If you (as an independent contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit. Free state filing online 3 - Advertising expenses. Free state filing online   You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Free state filing online For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit. Free state filing online 4 - Sale of meals or entertainment. Free state filing online   You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. Free state filing online For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit. Free state filing online 5 - Charitable sports event. Free state filing online   You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event. Free state filing online For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under What Entertainment Expenses Are Deductible?, later. Free state filing online Individuals subject to “hours of service” limits. Free state filing online   You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. Free state filing online The percentage is 80%. Free state filing online   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. Free state filing online Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. Free state filing online Interstate truck operators and bus drivers who are under Department of Transportation regulations. Free state filing online Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. Free state filing online Certain merchant mariners who are under Coast Guard regulations. Free state filing online What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. Free state filing online Entertainment. Free state filing online   Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Free state filing online Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. Free state filing online   Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families. Free state filing online A meal as a form of entertainment. Free state filing online   Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. Free state filing online A meal expense includes the cost of food, beverages, taxes, and tips for the meal. Free state filing online To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. Free state filing online    You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. Free state filing online    Meals sold in the normal course of your business are not considered entertainment. Free state filing online Deduction may depend on your type of business. Free state filing online   Your kind of business may determine if a particular activity is considered entertainment. Free state filing online For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally is not considered entertainment. Free state filing online This is because fashion shows are typical in your business. Free state filing online But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show generally is considered entertainment. Free state filing online Separating costs. Free state filing online   If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. Free state filing online You must have a reasonable basis for making this allocation. Free state filing online For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. Free state filing online Taking turns paying for meals or entertainment. Free state filing online   If a group of business acquaintances takes turns picking up each others' meal or entertainment checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense. Free state filing online Lavish or extravagant expenses. Free state filing online   You cannot deduct expenses for entertainment that are lavish or extravagant. Free state filing online An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Free state filing online Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Free state filing online Allocating between business and nonbusiness. Free state filing online   If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. Free state filing online You can deduct only the business part. Free state filing online If you cannot establish the part of the expense for each person participating, allocate the expense to each participant on a pro rata basis. Free state filing online Example. Free state filing online You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. Free state filing online Only 4/11 of the expense qualifies as a business entertainment expense. Free state filing online You cannot deduct the expenses for the seven social guests because those costs are nonbusiness expenses. Free state filing online Trade association meetings. Free state filing online   You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. Free state filing online These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. Free state filing online Entertainment tickets. Free state filing online   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. Free state filing online For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers. Free state filing online Exception for events that benefit charitable organizations. Free state filing online   Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. Free state filing online You can take into account the full cost you pay for the ticket, even if it is more than the face value, if all of the following conditions apply. Free state filing online The event's main purpose is to benefit a qualified charitable organization. Free state filing online The entire net proceeds go to the charity. Free state filing online The event uses volunteers to perform substantially all the event's work. Free state filing online    The 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to such a charitable sports event. Free state filing online Example 1. Free state filing online You purchase tickets to a golf tournament organized by the local volunteer fire company. Free state filing online All net proceeds will be used to buy new fire equipment. Free state filing online The volunteers will run the tournament. Free state filing online You can deduct the entire cost of the tickets as a business expense if they otherwise qualify as an entertainment expense. Free state filing online Example 2. Free state filing online You purchase tickets to a college football game through a ticket broker. Free state filing online After having a business discussion, you take a client to the game. Free state filing online Net proceeds from the game go to colleges that qualify as charitable organizations. Free state filing online However, since the colleges also pay individuals to perform services, such as coaching and recruiting, you can only use the face value of the tickets in determining your business deduction. Free state filing online Skyboxes and other private luxury boxes. Free state filing online   If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot deduct more than the price of a nonluxury box seat ticket. Free state filing online   To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. Free state filing online For example, renting a skybox for a series of playoff games is considered renting it for more than one event. Free state filing online All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination. Free state filing online   Related parties include: Family members (spouses, ancestors, and lineal descendants), Parties who have made a reciprocal arrangement involving the sharing of skyboxes, Related corporations, A partnership and its principal partners, and A corporation and a partnership with common ownership. Free state filing online Example. Free state filing online You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. Free state filing online The cost of regular nonluxury box seats at each event is $30 a seat. Free state filing online You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). Free state filing online Food and beverages in skybox seats. Free state filing online   If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. Free state filing online The amounts separately stated for food and beverages must be reasonable. Free state filing online You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals. Free state filing online What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. Free state filing online Club dues and membership fees. Free state filing online   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. Free state filing online This rule applies to any membership organization if one of its principal purposes is either: To conduct entertainment activities for members or their guests, or To provide members or their guests with access to entertainment facilities, discussed later. Free state filing online   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. Free state filing online You cannot deduct dues paid to: Country clubs, Golf and athletic clubs, Airline clubs, Hotel clubs, and Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Free state filing online Entertainment facilities. Free state filing online   Generally, you cannot deduct any expense for the use of an entertainment facility. Free state filing online This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. Free state filing online   An entertainment facility is any property you own, rent, or use for entertainment. Free state filing online Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. Free state filing online Out-of-pocket expenses. Free state filing online   You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. Free state filing online These are not expenses for the use of an entertainment facility. Free state filing online However, these expenses are subject to the directly-related and associated tests and to the 50% limit , all discussed earlier. Free state filing online Expenses for spouses. Free state filing online   You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. Free state filing online However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. Free state filing online Example. Free state filing online You entertain a customer. Free state filing online The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. Free state filing online The customer's spouse joins you because it is impractical to entertain the customer without the spouse. Free state filing online You can deduct the cost of entertaining the customer's spouse. Free state filing online If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible. Free state filing online Gift or entertainment. Free state filing online   Any item that might be considered either a gift or entertainment generally will be considered entertainment. Free state filing online However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift. Free state filing online   If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. Free state filing online You can treat the tickets as either a gift or entertainment, whichever is to your advantage. Free state filing online   You can change your treatment of the tickets at a later date by filing an amended return. Free state filing online Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. Free state filing online   If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. Free state filing online You cannot choose, in this case, to treat the tickets as a gift. Free state filing online Prev  Up  Next   Home   More Online Publications
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Free state filing online Publication 570 - Additional Material Table of Contents This image is too large to be displayed in the current screen. Free state filing online Please click the link to view the image. Free state filing online Tax Publications for Business Taxpayers Prev  Up  Next   Home   More Online Publications