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Business Tax Tip: Holiday Party Tax Deductions

With the holiday season in full swing, tax planning is needed for your business to maximize your holiday party deductions.

Generally, meals are 50% deductible and entertainment is no longer deductible.

A holiday party for employees (and their guests) is still fully 100% deductible (unless it discriminates in favor of officers, owners and highly-compensated employees).

IRC Section 274(e)(4) includes expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees). For example, this would include employee activities for a Christmas or holiday party, annual picnic, or summer outing.

A holiday party for employees that doesn’t discriminate in favor of officers, owners and highly-compensated employees would therefore be 100% deductible.

A holiday party where clients, vendors, prospects and referral sources were invited would not be an employee party. In this case, meals are 50% deductible and entertainment is nondeductible.

To maximize your tax deductions you could always have 2 parties (one for employees that is 100% deductible and one party for business guests – which is partially tax deductible); however, the economic costs of having two parties may offset the tax savings from an employee only party.

 

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