HOW TO DEDUCT EVERY DOLLAR OF YOUR ENTERTAINMENT EXPENSE - LEGALLY
The term "entertainment" has a broad meaning and includes almost any activity that might satisfy the personal, living or family needs of an individual. The entertainment can take place in such diverse surroundings as a cocktail lounge, sports arena, amusement park, or theater. The IRS keeps your feet to the fire by asking its examining agents to check entertainment expenses closely. General Rules: You must establish that the entertainment activity was "directly related to the active conduct of your trade or business." There are the basic rules: At the time the entertainment expenditure is made, you must have had more than a general expectation of deriving some business benefit. (Picking up the check of a business acquaintance who ate alone on the other side of a quiet restaurant is a nice gesture, but does not qualify.) During the entertainment period a business meeting, negotiation, or other bona fide business discussion or transaction took place. (It is not necessary that more time be devoted to the business than to the entertainment activity.) The principal character of the combined business and entertainment was the active conduct of your trade or business (as opposed to social purpose). The person for whom the expenditure was made engaged with you in the active conduct of your trade or business. (As a practical matter, this excludes nonbusiness persons who were also present.) Exception: There is one significant exception to the general rule. Associated Entertainment: Expenditures that are not deductible under the general rules are allowed when a. associated with the active conduct of your trade or business and b. the entertainment directly precedes or follows a substantial and bona fide business discussion. EXAMPLE: Joe Exec's out-of-town customers and their wives arrive the evening before a business meeting. Joe and his wife entertain the customers and their wives that evening. The next day the men have an all day business meeting. The entertainment is considered to have directly preceded the business discussion. Only expenditures for business associates are allowed. Anyone whom you could reasonably expect to deal with in the active conduct of your trade or business can qualify as a business associate -- that is, your customer, client, supplier, employee, partner, agent or advisor. It is easiest to explain the rules by example. EXAMPLE: Joe Exec sees three men sitting at a quiet bar in his hotel. One is the president of a business that is an established customer of Joe's. The president is with his sales manager and a friend whose business is unrelated to Joe's. All four men have a substantial business discussion, and Joe picks up the tab. That portion of the expenditure attributable to Joe, the president and the sales manager is deductible. The fourth part is excluded because the friend was not closely connected to the president. And now some words about spouses. First, someone must qualify as a business associate. Once that relationship is established, all expenditures for the business associate's spouse and spouse's of those persons closely related to this associate, will qualify as deductible in the same manner. Happily, the expenditures for your spouse also are deductible. EXPLODING A MYTH Somehow a myth was started concerning how much any particular taxpayer is allowed for entertainment without any proof to the IRS. The myth persists today. The important point -- it is a myth. In the real world, with real Internal Revenue Service Agents, the amount allowed without any proof is absolutely zero. Remember, once the entertainment expendi-ture is allowed, only 50 percent is deductible. Would you like to learn how to deduct every dollar of your travel and entertainment expenses allowed under law? Send for the companion Special Reports: (1) The Complete Guide to Building Your ENTERTAINMENT Deductions ...Legally; (2)...TRAVEL Deductions; (3) ...AUTO Deductions -- $25 each, or $57 for all three. Write to Book Division, Blackman Kallick Bartelstein, LLP, 300 South Riverside Plaza, Chicago, Illinois 60606.