ICYMI: Holiday Office Party Still A 100% Deduction
As we enter into the ‘holiday season’ you and/or your clients may be considering holiday parties for the employees. 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, let’s 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. Although the definition is subjective and leaves a gray area, 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. Divide your guest list by employees, business associates, and friends/family. That way, it will be easy for you to properly deduct the appropriate amount.