Basic Principles for Entertainment Deduction

Entertainment expenses are costs associated with activities that constitute recreation or amusement. These expenses include attending sporting events, social events such as parties, stage shows, and other similar costs. Historically, the deductibility of entertainment expenses was not straightforward and subject to specific criteria. After the enactment of the Tax Cuts and Jobs Act (TCJA), entertainment expenses are subject to more simplified and encompassing restrictions for deductibility. However, some aspects of entertainment expenses still exist that taxpayers should be aware of and consider.

Generally Nondeductible

The TCJA generally made entertainment expenses nondeductible since its enactment in 2017. This change eliminates various costs qualifying as entertainment activities that taxpayers could previously deduct. Entertainment events that taxpayers host or attend with clients or other business affiliates for purposes of business are no longer deductible. Additionally, costs for using facilities for entertainment, including rent depreciation, lease payments, etc., are also nondeductible. Notably, membership dues for clubs fall under nondeductible entertainment expenses, regardless of whether the club is for business, entertainment, or other social purposes.

Deductible Entertainment Expenses

Entertainment expenses taxpayers incur that are ordinary and necessary for the type of business in which they engage may be deductible. 

In addition to business-specific considerations, there are exceptions to the general nondeductible rule for entertainment expenses that taxpayers may deduct.

• The cost of food and beverages for their employees, provided the taxpayer furnishes them on their business premises
• Entertainment expenses that taxpayers included as compensation for their employees as wages
• Reimbursed entertainment expenses from an employer (provided the employer did not include them in the taxpayer’s wages as compensation) or other individuals (if the taxpayer can substantiate them)
• Recreational expenses for a taxpayer’s employees, such as holiday parties or other social gatherings
• Entertainment expenses directly related to business meetings for employees,stockholders, agents, or directors
• Entertainment expenses for attending business meetings for IRC §§501(c)(3) and 501(a) exempt organizations
• Entertainment expenses for goods or services that the taxpayer makes available to the general public, which would not include employees or an exclusive list of guests.
• Entertainment expenses for goods or services that the taxpayer sells to customers
• Entertainment expenses a taxpayer pays a non-employee as compensation, except for expenses that are required to be included (or would be required except that the amount is less than $600) in any information return filed by such taxpayer

The above text is adapted from the 2023 University of Illinois Federal Tax Workbook, Chapter 3: Independent Contractors.

Sources

• IRC §274(a).
• Treas. Reg. §1.274-2(b)(1).
• IRC §274(a).
• Tax Cuts and Jobs Act. PL 115-97. §13304(a).
• IRS Pub. 463. Travel, Gift, and Car Expenses.
• IRC §274(a)(3).
• Treas. Reg. §1.274-2(d).
• IRC §274(e).

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