A Tax Savings Guide to the Holidays: Tax Deductible Business Party

You can save tax money by throwing a holiday party – but make sure it’s business-related

In parts one and two of our guide to saving on taxes during the holidays, we talked about scheduling a business meeting on the way to visit relatives and deducting part of your travel expenses as well as putting a tax deductible gift to yourself under the tree.

Another great idea for saving tax money during the holidays is to throw a tax deductible holiday party for your employees or customers.

Not only is throwing a party a great way to get into the holiday spirit, it can boost employee morale and make your customers/clients happy.

But it’s not all fun and games. Your party must be directly related to your business in order for you to deduct it. Essentially what this means is you can’t go too crazy. The IRS will disallow anything it considers lavish or extravagant as well as anything that isn’t directly related to your business.

At some point you must actually conduct business, either before, during, or after the meal/entertainment portion of the party. This can include a product demonstration, a new product or service launch, or a sales pitch, to name just a few options.

And not all party guests are created equal, at least not according to the IRS. A party for your employees and their spouses or the general public is 100% deductible. But a party for customers, prospective customers, or independent contractors is only 50% deductible. If your party is for mixed company, you can take the deduction proportionally, based on the percentage of guests in each category.

Be aware that you cannot deduct the attendance of family members, even if they are employees or owners of the business. Do your best to keep family members and personal friends to a minimum. Even if you don’t deduct their portion of the party, the IRS may question how relevant the party is to your business, especially if they constitute more than half of the people in attendance.

Most business parties will be constituted of multiple types of deductions. You can only deduct 50% of meals and entertainment, but you can deduct 100% of many other expenses. So be sure to separate out the expenses that are 100% deductible from the expenses that are 50% deductible to make sure that you don’t lose any potential deduction.

As with all of the deductions you claim, you must keep records. And in the case of a party, you should probably keep more than usual. Relevant documentation could include a guest list, pictures and video of the business portion of the proceedings, and receipts for all of your expenses.

Follow these simple guidelines and you should have no problem. So throw a holiday party and look forward to a bigger refund after you file your 2012 tax return!

Photo via David Blackwell. on Flickr.

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