By Joyce M. Rosenberg, AP Business Writer
NEW YORK (AP) — Business owners get a gift from the government when they celebrate the holidays with employees and customers: tax deductions!
Parties, dinners and gifts are all deductible expenses. There is a bit of Uncle Scrooge, though, in Uncle Sam. There are limits on how much you can deduct.
ENTERTAINING CLIENTS AND CUSTOMERS
The government has a 50% limit on the amount you can deduct for taking clients or customers out to dinner or to events like a Lakers game or Broadway show. It has another rule that says the main purpose of the dinner or event must be "the active conduct of business." And that as a result of the event, "you had more than a general expectation of getting income or some other specific benefit at some future time."
So, technically, if you got together with a client or customer just to foster a good relationship but you didn't discuss a specific project or contract, the occasion isn't deductible.
Of course, if you're at the theater, it's pretty hard to seal that deal. But the government does allow deductions for events that are directly before or after what the IRS calls a substantial business discussion. So if you talk about that contract at dinner and then see a show, the entire evening is deductible.
Be aware though, the government isn't going to allow you to deduct the cost of a meal or event that's considered lavish. What is lavish? The IRS says the cost of a meal or event must be "reasonable based on the facts and circumstances." A $200 dinner bill in Manhattan may not be lavish, but it might be in a small town in the Midwest.
Very often a business owner and client will bring spouses along for a dinner. The IRS won't allow their meals to be deducted unless you can show there was a clear business purpose for including them.