Now is the time to plan for a company party, office party or event, follow these 3 simple rules and deduct 100% of your next company gathering
Whether it's an office party or office event here are some basic tips to impact your bottom line with smart planning:
- Its important to understand the tax implications of an office party expense in order to reap the full benefit to your bottom line.
- Event expenses for employees and spouses are 100% deductible but expenses are only 50% deductible for customers and contractors, and 0% for other family members.
- Record your party expense in a separate category from other meals and entertainment and keep clear records to substantiate your claim.
With summer fast approaching, your company may be considering taking advantage of the warm weather by hosting an office morale event or holiday party to foster camaraderie and boost employees spirits. Before you do, however, its important to understand the tax implications associated with this kind of expense and what you can and cannot deduct.
In general, the IRS code only allows for 50% deductibility of meals and entertainment expenses incurred by a business. However, there is a special category within meals and entertainment for which the IRS allows 100% deductibility, and your holiday parties and morale events can meet those requirements if you follow a simple set of guidelines.
The first rule:
Many party expenses are only 100% deductible for employees and their spouses. Unfortunately, other family members do not count so if youre inviting kids to the companys summer BBQ, you wont be able to deduct anything for the cost of those kiddie meals. On the bright side, any customers, prospective customers, or independent contractors you invite are eligible for the standard 50% meals and entertainment deduction.
If youre extending the guest list beyond just employees and spouses, it can get a little complicated keeping track of which portion of the bill is eligible for 0%, 50%, or 100% deduction. In order to provide substantiation of your claim in the event of an audit, be sure that you have receipts and a complete guest list on hand.
Finally, to limit the chance of misinterpretation, be sure to record the expense as holiday party or office expense. Many businesses mistakenly record morale events as meals and entertainment, which raises questions when tax time rolls around and they are hoping to deduct 100% of those expenses. After all, the meals and entertainment category is only eligible for 50% deduction. So its generally best to keep your holiday party expenses separate from other meals and entertainment for claritys sake.
With smart planning and a little extra effort put into recording the expenses for your next office party, youll be able to capitalize not only on increased goodwill and improved morale, but also on a 100% tax deduction that will directly impact your bottom line.
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The purpose of this article is to provide general best practice guidelines. This article is not written as legal or tax advice directed at the particular facts and circumstances of any specific person or business. We recommend you consult your local CPA or attorney to ensure your unique and specific needs are fully addressed.
About the author
Alexander J. Hart of Cuban American decent is principal and founder of Hart Vida Raffo. With over 25 years of experience, Alex specializes in the areas of tax strategy and planning, business process improvement, and capital consulting. Whether advising on capital and financing strategy or consulting for privately-held professional services firms, Alex has the expertise and practical know-how to help any company optimize their business processes and make tactical financial decisions. He began his career at IBM in sales operations and accounting. He was a Controller for the N.Y. Post, has been a CFO for a medical device company, and has written a tax column called “Ask the Tax Guys” for Micro-Cap Review. Alex is a professional member of A.L.T.A. (Affiliated Lawyers of the Americas), a member of the National Association of Tax Preparers, and is a contributing author and mentor at Latin Business Today. Alex graduated from St. John’s University with a B.A. in Spanish and his M.B.A. in Finance. He obtained his accounting degree from Pace University.Website