Richard J. Harris, CPA – Newport Beach, CA

The Long & the Short of It – In any one calendar year you are allowed to give business gifts of $25 per person.  Note also that gifts to, say a client’s wife, are imputed to that client.  Also, if you and your wife are in business together, the $25 limit is shared by both you on a per client basis.

In the “not gifts” category are those free pens with the company name and logo.  (That is as long as the pens don’t cost you more than $4.00.) 

Also note that any item that can be considered either a gift or entertainment, is generally considered as entertainment and subject to the 50% rule. 

If you give a customer tickets to an event it can be treated as either entertainment or a gift.  If you take a customer to an event, it is considered entertainment and subject to the 50% rule.

When is a gift not a gift?  Answer, when it’s Advertising and Promotion.  Example – trade show give away items.

Rick Harris Income Tax Advice Income Tax Advice

You may deduct business-related entertainment expenses (if both ordinary and necessary) for entertaining clients, customers or employees.  There are two tests:

Directly Related Test    1.) The main purpose was the active conduct of business.   2.) You actually discussed business .   3.)  You had more than a general expectation of benefiting business-wise.

or,

Associated Test   1.)  The entertainment was associated with the active conduct of your trade or business.  2.)  And, directly before or after a substantial business discussion.

As has been the case for the last several years, only 50% of your entertainment expense is deductible.  Also of note is the rule that the expense can not be lavish or extravagant.

Additionally, a “clear business setting” rule must be met.  Examples of non- “clear business settings” are nightclubs, theaters, sporting events, cocktail parties and meetings that include persons who are not business related people – such as spouses, other golfers, etc.

Lavish or Extravagant Expenses.  (Quoted from IRS Pub. 463)  You can not deduct expenses for entertainment that are lavish or extravagant.  An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances.  Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs or resorts.

Entertainment Expenses That Are Not Deductible.  Club dues and membership fees paid to Business, Pleasure, Recreational or Other Social Clubs.  This group includes the likes of Country, Golf, Athletic, Airline, Hotel and Other Clubs.  The bottom line – dues and membership fees are almost never deductible.

Seems easy enough.  If only.

Rick Harris Income Tax Advice Income Tax Advice