by LawInc Staff
December 20, 2017
With the holidays fast approaching, employers are eager to throw their annual office holiday parties.
Business holiday parties are a great opportunity for everyone to take break from work and relax. These events can also be an opportunity for employers and business owners to showcase their latest products or services or inform their employees of upcoming changes to the business.
Whatever the reason, it is important to consider the rules and regulations the IRS has regarding holiday office party deductions, what is and is not tax deductible and what can be completely deducted.
Business owners sometime throw lavish events and include employees, their spouses, clients, potential clients, investors and friends.
For tax purposes, it is important to consider what expenses can and cannot be fully deducted under such circumstances.
Rule 1: Holiday Office Party Deductions: Must be for Employees & Their Spouses
100% of the costs associated with throwing a party for employees and their spouses or significant others is tax deductible. A party hosted for the sole benefit of employees and their families is 100% tax deductible.
However, if the party also includes the business owner’s friends, customers, independent contractors, vendors or any other business related associates, it is subject to the “Meals & Entertainment” limitation of 50%. The party must have a substantial business element to it. For example, there must be a business related discussion, reveal of a new product or service or any other matters relating to the business. 50% of costs related to the holiday party may be deducted by the business owner.
Where a holiday party includes both employees and other non-employee business associates, things become a little more complicated. 100% of the cost allocated to the employees will be deducted but only 50% of the costs to the others may be deducted.
There are no holiday office party deductions allowed for the business owner’s family members, even if they are employed by the company or own a portion as well. These expenses are categorized as “personal” by the IRS.
For example, lets say your holiday party had 200 guests and cost $2,000. 100 employees, 80 business associates and 20 of the business owner’s family members. The IRS allows you to deduct 100% of the cost of the 100 employees ($1000). In addition, you are allowed to deduce 50% of the cost of the business associates ($400) but no deductions are allowed for family members. Therefore, you may deducted $1,400 of your expenses from your taxes.
Rule 2: Party Cannot be “Lavish or Extravagant”
The IRS requires that the party not be “lavish or extravagant” but be reasonable considering the circumstances of the business. Meaning, that what Facebook and Google find “reasonable” might not necessarily be reasonable for your small business startup.
Although the definition is subjective and leaves a gray area, when it comes to the IRS, you do not want to mess around. Keep your party modest and simple to avoid any potential issues with the IRS.
Rule 3: The Invitation
Most important, extend your holiday party invitation to all employees. A holiday part is intended to acknowledge your employees’ hard work and celebrate the company’s existence. Picking and choosing what employees you do and do not want to invite to the party does not only invite a lawsuit for discrimination but can also leave you potentially liable in case of an audit.
Also, keep a copy of the invitation and make sure it includes language that the party is for the business. A good example of what to write on the invitation is “It’s that time of year again! Join (company’s name) in celebrating the annual office holiday party!” Something simple that gets the point across. This will be good proof in case of an audit.
Rule 4: Document Everything
Keep a copy of the guest list, all expenses or anything else you find necessary. Not only does this ensure your safety in case of an audit, but it also provides your CPA with the proper tools and resources to deduct as much as legally possible.
Divide your guest list by employees, business associates, and friends/family. That way, it will be easy for your CPA or bookkeeper to properly deduct the appropriate amount. Also make sure your CPA is aware of the differences in tax deductions between holiday parties and other entertainment related expenses.
Follow these rules, enjoy the holiday season, surround yourself with friends and family and Happy Holidays!