Questions:

Do you take Customers and prospective Customers on weekend trips to help build your business?  Can you deduct the expense related to these trips from your taxable income?

Short Answer:

Yes – the expenses related to these trips are a valid tax deduction.  If you keep good records that prove the trips are related to business, you can deduct a lot of the expenses related to the trip.

If you take Customers fishing or hunting and use equipment that you rent or own, some of the deductions will be denied, but we’ll get into more detail on that later.

Long Answer:

There are four tax law requirements that you need to meet in order to make these entertainment expenses deductible:

1. Business Reason – You need to come up with and record specific reasons why you expect the trip to generate income or benefits to your business. Even if the trip doesn’t result in a sale, you can still deduct the expenses.

2. Connecting Business with Entertainment – The business activity must occur at a similar time of the entertainment. Business activities include: negotiating sale terms, explaining products or services, strategizing business development and opportunities, and discussing customer concerns and questions. You will meet this requirement if the business and entertainment activities occur on the same day. If the business activity occurs on a different day, you’ll need to document the reason why. For example, if your customers had to travel from out of town, you might need to split the activities. Remember, it’s always FORM OVER SUBSTANCE with the IRS!

3. More Business than Pleasure – This requirement is where most business owners often fail. The overall purpose of the trip MUST BE MORE related to business than pleasure. This is not merely a question of time. You can spend more time on entertainment activities during the trip and still deduct the expenses, as long as you can document that the purpose of the trip was for business activities. Again, keep good records!

4. Paying for the Right People – Tax law lists the following groups of people as approved guests to meet this requirement: “Clients, Customers, suppliers, employees, agents, partners and professional advisors, whether established or prospective”
   [Reg. Section 1.274-2(b)(2)(iii)]. You are permitted to pay for a ‘closely connected’ person in addition to your approved guests. IRS does not specifically define a ‘closely connected person,’ beyond saying that it included spouses [Reg. Section 1.274-2(d)(2)]. However, if you are paying for a ‘closely connected’ person, you must document why it was important to include them on the trip.  You need to prove that the overall goal of the trip was to grow or promote your business.

 You know we’re crazy about good record-keeping at Franty & Company, so here is a list of the documentation you should maintain for entertainment trips and expenses:

1. Amount and type of expenses you incur;
2. Time and place of travel or entertainment;
3. The business purpose of the expenses; and
4. The business relation between you and each attendee.

The majority of these entertainment expenses will be 50% deductible for tax purposes. However, if you can show that the expense is an integral part of your business, you may be able to deduct 100% of the expense.

Reg. Section 1.274-2(b)(1(ii) states that the objective test can determine whether the activity is considered entertainment or not. “A theater critic can fully deduct the cost of attending theater performances he reviews. To the critic, the performances are not entertainment as he cannot perform his job without attending performances.”

Entertainment Facilities

Earlier we mentioned that using hunting or fishing equipment that you own cannot be deducted as entertainment expenses. While the dictionary defines ‘facilities’ as a building or piece of equipment, the tax law has a broader definition:

“‘Entertainment facility” is any real or personal property owned, rented or used by a taxpayer in connection with an entertainment activity” [Reg Section 1.274-2(e)(2)].

If you’re taking Customers fishing or hunting, your personally owned or rented fishing rods and shotguns are considered Entertainment Facilities.  When they are used for business entertainment, they are not depreciable or deductible. The gasoline purchased for your fishing boat and shells purchased for use during the trip are deductible as entertainment expenses.