Can Your Clients Deduct Customer Appreciation Events and Team Building Costs?

Customer appreciation and team-building events can be great strategies for taxpayers to network and improve working relationships. While these expenses may certainly relate to a taxpayer’s business, they aren’t always fully deductible. In this blog post, we’ll discuss the tax treatment of meals and entertainment expenses, including how taxpayers can maximize their deductions.   

Deductible Entertainment Expenses

The rules and regulations surrounding meals and entertainment are constantly changing. Prior to 2017, taxpayers could deduct up to 50% of entertainment expenses. However, after the passage of the 2017 Tax Cuts and Jobs Act, most entertainment became non-deductible.

Under Section 1.274–2(b)(1)(i) of the Income Tax Regulations, the IRS defines entertainment as any recreation or amusement activity, such as sporting events, country clubs, nightclubs, theaters, hunting or fishing trips, or cocktail lounges. There are a few notable exceptions to this rule:

1. Event Food – Food purchased at the entertainment event is 50% deductible if the taxpayer has a separate receipt or invoice.
2. Direct Advertising – Direct advertising, such as sponsoring a hole at a golf outing, is 100% deductible.
3. Full Staff Events – Full staff events, such as a team building outing, company dinner, or holiday party, are 100% deductible. Venue booking, accommodation, and other entertainment costs are also 100% deductible at full staff events.

Deductible Meal Expenses

Generally, taxpayers can deduct 50% of meal expenses; however, the One Big Beautiful Bill Act altered the deductibility of meals provided for the employer’s convenience. Here’s a detailed breakdown of the deductibility of meals for tax years 2025 and 2026:

While the One Big Beautiful Bill restricted common area and non-travel employee meals, it did expand the deductibility of meals provided on certain fishing boats and at fish processing facilities, which are 100% deductible.

Documentation and Compliance

Blanket rules related to meals and entertainment require that an employee, owner, or manager be present to be deductible. For example, in order to deduct 50% of a lunch with clients, an employee must be present and  the expense must have a business purpose- such as taking a client to lunch to discuss a new business partnership. Finally, the expense must be ordinary and reasonable.

Section 1.274–2(b)(1)(ii) does provide an objective test to help taxpayers differentiate between deductible and non-deductible expenses. The objective test evaluates the expense in relation to the taxpayer’s business activity. For example, theater performances would generally be considered non-deductible entertainment. However, if the taxpayer’s business is a professional theater critic, it would be fully deductible.

Regardless of whether the expense is clearly deductible or on the fence, detailed records and receipts will be paramount to substantiating deductions. Each meal or entertainment expense should have an attached receipt or invoice to support the deduction. Taxpayers will need to pay closer attention to documentation when there is a mix of non-deductible entertainment and deductible meal costs.

Practical Tips for Businesses

While there are few workarounds to non-deductible entertainment and meal limitations, there are strategies taxpayers can implement to maximize deductions. Here are four practical tips:

1. Set Clear Expense Tracking Procedures – Clear expense tracking procedures will be important to keep information organized and accurate. Taxpayers should have defined policies for substantiating expenses, which may include investing in expense management software.
2. Link Expense to Business Outcomes – Linking expenses to business outcomes can prove a taxpayer’s deduction in the event of an audit, especially when claiming certain entertainment costs. For example, a taxpayer might link a team bonding outing to improvements in teamwork and productivity.
3. Offer Full Staff Events – Full staff events are 100% deductible. When planning customer appreciation events or team building outings, taxpayers should include the entire team. While every staff member does not need to attend, extending the invite to the full staff can unlock a larger deduction.
4. Break Out Meal Costs – Taxpayers who have both meals and entertainment at the same outing should have separate receipts and invoices to support deductions. For example, a taxpayer may choose to ask for a meal receipt separate from the cost of a non-deductible ticket.

Summary

Taxpayers should be cautious when recording  meal and entertainment expenses.  While customer appreciation events and team-building expenses may be fully deductible, taxpayers should retain adequate supporting documents and carefully review each expense to ensure they are essential.

By Rachel Szeklinski, CPA

Sources:

• Notice 2018-76, Expenses for Business Meals Under § 274 of the Internal Revenue Code | Internal Revenue Service
• One Big Beautiful Bill Implements Significant Tax Package | University of Illinois Tax School