Business Entertainment Expenses

Entertainment expenses that are both ordinary and necessary in carrying on a trade or business may be deductible if they meet one of the two tests:

  • The directly-related test, or
  • The associated test

See Publication 463, Travel, Entertainment, Gift and Car Expenses, for more detailed information about these two tests.

You must have records to prove the business purpose (under the applicable test) and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. For further information on record keeping, refer to Topic 305.

Generally, only 50% of food and beverage (“meal”) and entertainment expenses are allowed as a deduction. For exceptions to the 50% limitation, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.

If you are an employee whose deductible business entertainment expenses are fully substantiated and reimbursed under an accountable plan, the reimbursement should not be included in your wages on Form W-2 (PDF) and you should not deduct the expenses. If your expenses exceed the reimbursement you received under an accountable plan, if you were reimbursed under a nonaccountable plan, or if you are not reimbursed at all, you can use Form 2106 (PDF), or Form 2106-EZ (PDF) to deduct employee business entertainment expenses that otherwise qualify as deductible expenses. Unreimbursed expenses and expenses that exceed reimbursement under an accountable plan are carried over to Form 1040, Schedule A (PDF), and are generally subject to the 2% of adjusted gross income limit. Refer to Topic 508 for more information on the 2% limit, Topic 305 for more information on record keeping requirements, and Publication 463 for a definition of accountable and nonaccountable plans.

If you are self-employed, use Form 1040, Schedule C (PDF), or Form 1040, Schedule C-EZ (PDF), or if you are a farmer, use Form 1040, Schedule F (PDF), to deduct these expenses.

For more information on deductible and nondeductible meal or entertainment expenses, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.

Source: Internal Revenue Service
Last reviewed: September 22, 2013