2019 will be here before you know it. And you know what that means: It’s holiday party time.
As the holiday season comes and goes, all sorts of events find their way into corporate America’s winter schedule. Your work may have held a Christmas bash, an otherwise festive holiday party, or you may simply be raising a glass to another great year. From potlucks around Thanksgiving to end-of-year gifts for a strong Q4, businesses of all sizes find countless ways to celebrate around the end of the year.
Whatever the occasion may be, that celebrating can be costly.
Many business owners unfamiliar with the nitty gritty of tax deductions tend to start asking the same thing around this time of year: What counts as a business expense, anyway?
For about 80% of every year, business owners seem to have a good sense of what will and won’t count as a business expense. For example, they may know that copier paper is a business expense. They know that a plane ticket to attend an investor meeting is a business expense. They also know that they can’t deduct a lunch at work just because they forgot to pack one from home today.
Unfortunately, the line can get a bit blurry when it comes to holiday and end-of-year parties.
Of course, not everything is deductible, and if you aren’t careful you may find yourself in hot water with the IRS. On that note, here’s everything you need to know about deducting expenses for your business’s holiday party!
We’re not trying to freak you out here, so full disclosure: Almost every expense associated with your holiday party is tax deductible—if you follow a few rules. Even Uncle Sam knows you need to unwind once in a while!
The trick is keeping the restrictions in mind. Let’s break down each guideline, and then apply them to a hypothetical party, our “2018 End-of-Year Bash.”
The IRS says a company can’t deduct expenses that are “lavish or extravagant.” But what does that mean, really?
Well, it doesn’t mean a DJ is out of the question, but it all depends on your company. For a multi-billion dollar company like Disney or Google, an ice sculpture, rented out space, and a high-profile band isn’t considered “extravagant.” The same thing for a company with thirty employees would be a different story.
For our hypothetical 2018 End-of-Year Bash, we want to avoid going overboard. A group reservation at a local steakhouse makes for a lovely holiday party and also an tax deductible event.
A party hosted for your employees and their families is entirely deductible, but the math gets more complicated once you start sending out invitations more widely.
Here’s why. If you invite one of your vendors, your party is no longer 100% deductible, because these new guests will fall under “Meals and Entertainment” (50% deductible). Of course, that also means you’ll need to include some type of business-related element to your holiday party to justify that 50% deduction. To cap it all off, any expenses for family and personal friends aren’t deductible at all. So now your accountant will need to break down your holiday party’s expenses between employees, business contacts, and personal guests.
Again, we kept things simple for our 2018 End-of-Year Bash. We kept the invitation to our employees and their families so that we could deduct 100% of the holiday party expenses. To avoid leaving our biggest vendor out in the cold, we held a separate dinner to discuss 2019 plans and say thank you—and deducted 50% of the meal.
When in doubt, keep the receipts. You’ll want to keep a track of exactly the costs your holiday party incurred, and that includes the invitation.
That 100% vs. 50% vs. 0% deduction headache can be avoided if you clearly identify who is invited to your party. When you make your guest list, identify the attendees you’re expecting and clearly list which group they fall into. Then, hang onto your receipts. Should you be audited, you can easily point to your guest list and know that of your 100 guests, only 15 were contractors.
At our 2018 End-of-Year Bash, we kept a file with the invitation, guest list, and an itemized receipt from the steakhouse we visited. We kept a separate file for our business partner dinner!
Throwing a party can be a really nice way of wishing your team a happy holiday or thanking them for a job well done. The price tag on these events can be a bit high, but if you take an organized approach to these expenses and follow a few rules, you can save big. And that’s the best way to kick off 2019!