It’s that time of year again, which means that company holiday parties are starting to roll out. Whether you are part of a large company or a small business owner with a few employees, holiday parties have been a way to celebrate successes and bring in the new year. But as a business owner, you may be wondering if your holiday bash is tax deductible.
The simple answer is, yes. However, like any business tax issue, there are some conditions that need to be met before you can start writing off any company-related party expenses. Let’s take a look at a few of these factors:
Is it for Employees, Clients or Both?
The first thing to consider is who is attending the party. If it is only for your employees and every employee is invited, then the cost can be fully deducted. However, if current clients or prospective clients are invited to the party, then you start running into more challenging tax deduction scenarios.
The only way to deduct client-related costs would be if the event is considered a substantial business activity. What counts as “substantial” may be a bit of a gray area, though. For example, you can deduct the event if there is a business-related element, such as a meeting or conference; however, giving a brief state-of-the-business speech in the middle of a holiday party would not suffice. Additionally, you can only deduct up to 50 percent of the cost if there are clients or prospective clients in the mix.
Keep All Documentation
Whenever you throw a holiday party and wish to deduct any portion of it on your business taxes, be sure and keep all the receipts and documentation. This would include a detailed list of all attendees such as employees, employee guests (spouses/children) and clients, as well as documentation on any and all business activities that took place during the event.
In addition, it’s worth knowing that the IRS will be wary of any expenses that seem extravagant. The total cost of the party should reflect the size of your company. If a small company spends what seems like an exorbitant amount on its party, tax deductions may be more scrutinized by an IRS auditor.
If you’re considering throwing a bash, don’t let the thought of tax deductions deter your decision for an office holiday party. Have fun and celebrate the year with your employees, clients or both. Just remember to keep records and take the time to understand what can and can’t be deducted come tax season.
For help with your business taxes and holiday party tax documentation, contact Ferguson, Timar & Company. We’ll make sure your taxes are done right.