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 Dear Tax Talk:
Is a holiday party for your employees considered an ordinary business expense and a 100-percent deduction, or entertainment and only a 50-percent deduction?
-- Gustave
 Dear
Gustave,
If only half of the cost was deductible, would
you only have half as much fun? The cost of entertaining
clients and employees has always been one of the
better tax deductions allowed by law.
The entertainment deduction was
originally curtailed to 80 percent of the cost
of meals and later, in the name of increasing
government revenues, it was cut down to 50 percent
of the cost. If you're in the highest tax bracket
of 35 percent, the 50-percent deduction means
that you save in taxes 17.5 percent of the cost
of the meal, or about the amount of the tip. The
deduction limitation hasn't hurt the restaurant
business. The 50-percent limitation applies in
general to food and beverage expenses.
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| Expenses subject to the 50-percent limitation |
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Those incurred to entertain customers at the office (such as ordering in lunch or dinner). |
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Meals incurred while traveling away from home such as on a business trip. |
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The tab when you invite a client to a meal at a restaurant. |
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There are exceptions when food and beverages provided for entertainment are exempt from the 50-percent limitation.
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| Expenses not subject to the 50-percent limitation |
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When a meal is ordered in for the convenience of the employer. |
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When it is made available to the general public, such as free hot dogs in connection with a business promotion. |
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Expenses for recreational, social, or similar activities (including facilities) primarily for the benefit of employees (other than employees who are officers, shareholders or other owners, or highly compensated employees). |
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Under the last exception, the annual employee Christmas party or summer picnic is exempt from the 50-percent limitation on entertainment.
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