The Holiday Season is coming and with it a lot of festivities and office parties. Having a holiday party is fun. If you own a business and are planning a party for your employees, that may be a deductible expense on your taxes. However, there are rules on deductibility. This article will go over requirements to hold a tax deductible office party for your employees.
A tax deductible holiday party for your employees must be just that, a party for your employees. If only employees and their family are present along with the owners, it is likely a fully deductible event. It cannot be a party for just you and your family. It cannot be a party for just customers. A party for the employees is 100% deductible but if non-employees are present, the character of the party changes and so does the amount that can be deducted. If you invite non-employee persons to the party it gets complicated. It may still be deductible, but not at 100%. The key issue is whether or not the party falls under the 50% deduction for entertainment expenses or not. If customers or independent contractors are present, then the party is not fully deductible. It breaks down like this: if 50 employees and their spouses are at the party and 100 customers, then half of the cost would be 100% deductible and half deductible at 50% (100 employee related guests and 100 non-employee related guess). Likewise, if you invite a few neighbors to the party who are not customers or potential customers, you cannot deduct any of the cost related to that number of attendees.
The party must be business related and it is best to have it at the office or a venue other than your home. No business activity need occur at the event, it just has to have a valid basis as an employee party. If IRS audits you and determines it was purely a social function, that is an issue. You can't have a block party for the neighborhood at your home, invite a few employees over and take it as a business deduction. Also, the party must be one that is not too extravagant. Although not required if it is all employees, a good idea would be to have some formal time at the party for a PowerPoint presentation, speech, or display of business products etc. If non-employees are present, this helps make sure the event is valid for a deduction as other entertainment for those persons.
Save your receipts for all the party expenses and when you give your tax preparer the annual list of income and expenses, be sure to let him know that the cost for the employee party is a 100% expense apart from other entertainment costs which are not. If you provide an expense spreadsheet and it is all listed as entertainment, then he can't know automatically that some of it was an employee party. Keep a list of those in attendance; with names, address etc. Note the relationship of the attendee to your business with this record (Ie customer, contractor, employee, family). Take pictures at the party. Save all of this information for 3 years after you file the tax return in case of audit.