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Publication 463

Chapter 2

You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. The rules and definitions are summarized in Table 2-1.
You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. Both of these tests are explained later.
An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.
The amount you can deduct for entertainment expenses may be limited. Generally, you can deduct only 50% of your unreimbursed entertainment expenses. This limit is discussed later under 50% Limit.

Directly-Related Test(p10)

To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that:
Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter.
You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. It is not necessary to devote more time to business than to entertainment. However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test.

Table 2-1. When Are Entertainment Expenses Deductible?

General ruleYou can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test.
  • Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client.
  • An ordinary expense is one that is common and accepted in your trade or business.
  • A necessary expense is one that is helpful and appropriate.
Tests to be metDirectly-related test
  • Entertainment took place in a clear business setting, or
  • Main purpose of entertainment was the active conduct of business, and
    You did engage in business with the person during the entertainment period, and
    You had more than a general expectation of getting income or some other specific business benefit.
 Associated test
  • Entertainment is associated with your trade or business, and
  • Entertainment is directly before or after a substantial business discussion.
Other rules
  • You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense.
  • You cannot deduct expenses that are lavish or extravagant under the circumstances.
  • You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit).
You do not have to show that business income or other business benefit actually resulted from each entertainment expense.

Clear business setting.(p10)

If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. The following situations are examples of entertainment in a clear business setting.

Expenses not considered directly related.(p10)

Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. The following are examples of situations where there are substantial distractions.