Good news for business owners and their employees – your office holiday party is 100% deductible if it satisfies two requirements regarding who is invited and how lavish it is. Do not go deducting anything just yet …make sure you speak with an accountant to ensure you are obeying the rules. Our clients in the Willow Grove area benefit from these types of check-ins and have peace of mind during the tax process.
First, you need to invite all your employees, not just some of them. You may also invite the employees’ spouse or significant other. Both employee and guest would be fully deductible.
Second, the party must be modest and reasonable, not lavish or extravagant. This is a bit of a gray area since the size and location of the company are factors. A Fortune 500 company in New York City could write off a more elaborate party than a small company in the suburbs. Live music or entertainment is also fully deductible, but again, avoid excess.
The goal is to provide a gathering that may be a little fancy but not beyond reasonable expectations, given your company’s situation. If the IRS audits and determines that your champagne ice sculpture and open bar were too lavish, you don’t just lose the deduction for that portion, you lose the deduction for the entire party.
Modest holiday gifts are considered “de minis” – an expense that is infrequent and small in value, thus making accounting for it impractical. Keeping holiday gift bags to well under $100 in value will keep them in the “de minis” category, which means they don’t even have to be reported. However, do not provide cash or gift cards with your holiday gift, as they are not considered “de minis” benefits and are, in fact, taxable.
Inviting customers and family to your holiday party
If you invite your friends or family, the costs associated with these guests are not deductible. This rule applies even if your family members work for the company.
You may invite customers, contractors, or vendors to your party, but expenses for them will only be 50% deductible, following the “meals and entertainment deductions” guidelines. In addition, you’ll need to include some sort of business-related offering, such as an announcement regarding a new product rolling out in the new year. Because of this requirement, many companies consider it easier to throw a separate event to thank their customers.
Helping out your accountant
Be sure to keep thorough records and receipts from your office holiday party expenses. Additionally, if you extended the invitation to customers or members of your own family, your accountant will need a list that identifies your guests as employees and their families, customers, and your own friends and family members.
To illustrate, consider a holiday party costing $10,000 for 100 people. The cost per person would be $100. If 75 guests were employees and their spouses (100% deductible), 20 were vendors or customers (50%), and 5 were your own family (0%), you would be able to deduct $8,500 for your modest but enjoyable holiday party. Your gift bags for each employee, which cost you $40 each, would not even have to be reported.
So don’t hesitate to throw the party! But in order to get the largest deduction, keep the party reasonable in cost and provide your accountant with clear documentation. Give us a call at Koelle, right here in Willow Grove, PA, to help you with your accounting needs.