Entertainment Expenses of Non-Employees
Although travel costs of a non-employee spouse, dependent, or other person may not be deducted, you may deduct the cost of such person's participation in the entertainment of business clients at conventions or business trips under certain conditions described below.
Directly related dining or entertainment (business discussion during dining or entertainment):
If a spouse or other person participates in the dining or entertainment that qualifies as directly related entertainment under the generally related test you may deduct entertainment-related costs for your spouse or other person(s).
Under the generally related test you must be able to show:
- A business motive for the dining or entertainment.
- You had more than a general expectation of getting future income or other specific business benefit (other than goodwill).
- A business meeting, negotiation, or discussion took place during the period dining or entertainment.
If audited, the IRS will want evidence that a business meeting, negotiation, or discussion took place during the period of dining or entertainment. If no discussion took place, you must prove that you would have discussed business had it not been for circumstances beyond your control.
Goodwill entertaining (business discussion before or after dining or entertainment instead of during entertainment):
This is where there is a substantial and bona fide business discussion directly before or after the dining or entertainment (not during dining or entertainment like in the directly related test mentioned above).
An officially scheduled meeting at a convention is generally considered a bona fide business discussion. Generally, you may deduct the cost of goodwill entertaining of:
- Business associates and their spouses, and
- Yourself and your non-employee spouse or other person(s) participating in the dining or entertainment.
Bear in mind, food, beverages (including tax and tips), and the cost of the entertainment are only 50% deductible. In addition, only 50% of the face value of a ticket to an event is deductible regardless of what you may have actually paid (for example, to a scalper).
Transportation to and from the dining or entertainment facility are 100% deductible.
Example of Entertainment Expenses of Non-Employees:
- You attend a business convention and bring your spouse along for purely social reasons.
- Round-trip air fare for yourself and your spouse totaled $500 ($250 per ticket)
- Cab fare from the airport to the hotel and back to the airport cost $20 (including the tip)
- You reserve a double room for $200 per night for two nights. A single room would have cost $150 per night
- Goodwill entertaining:
- After the business meeting at the convention (held in your hotel) you take a business associate and a prospective customer, and their spouses, to dinner and a show.
- It would be impractical for you to leave your spouse alone so your spouse also participates in the business-related dining and entertainment.
- The costs of dining was $350 (including tax and tip)
- You bought six tickets to see a play. You paid a scalper $100 per ticket ($600). However, the face value of all tickets was $300 ($50 each x 6)
- Cab fare to and from the dining and entertainment facility was $30 (including the tip).
- Your own meal costs, other than those related to dining with business associates, totaled $80 (including taxes and tips).
- You leave a $10 tip for maid service at the hotel.
Your May Deduct the Following:
- Air Fare: $250 (100%) for your own air fare but not your spouse's.
- Cab fare: $20 (100%) for round-trip cab fare between the airport and hotel.
- Hotel Room: $300 (100%) for your room (the single room rate of $150 x 2 nights).
- Dining expenses: $175 (50% x $350) for dining expenses for yourself, your spouse, your business associate and prospective customer and their spouses.
- Tickets: $150 for the six tickets (50% x $300 - face value of all tickets).
- Cab fare: $30 (100%) round-trip for cab fare between the hotel, restaurant, and theater.
- Your own non-entertainment related meals: $40 (50% x $80) for your own meals, other than meals related to business entertainment.
- No meals for your spouse are deductible except for the meals related to the goodwill entertainment of business associates where your spouse participated.
- Hotel maid service: $10 tip (100%) for hotel maid service.