Go fishing for entertainment facility deductions

Has your small business finally made it “big”? You might be able to buy that boat you’ve always dreamed about. But while you’re enjoying the trappings of your success, there’s no direct tax benefit for your business. The tax law essentially prohibits business deductions for so-called “entertainment facilities.”

Strategy: Entertain clients on the boat when it suits your purposes. You can write off your out-of-pocket expenses that qualify as entertainment “associated with” your business.

Here’s the whole story: You generally can’t deduct the costs associated with a facility (such as depreciation or rent, maintenance and insurance) as entertainment expenses. The definition of an “entertainment facility” covers any property that you own, rent or use for entertainment. This includes yachts, hunting lodges, fishing camps, tennis courts, bowling alleys, cars, airplanes, apartments, hotel suites and vacation homes.

But you can still deduct the additional out-of-pocket cost of associated-with entertainment that precedes or follows a substantial business discussion with a client. If the client is from out of town, the entertainment may take place the day before or after the business meeting.  

Example: Suppose you meet on Friday with clients from a city 500 miles away. Then you invite the clients out on a boating excursion on Saturday. You can write off the additional cost of food, drinks and fuel to run the boat and other entertainment expenses—even the fish bait!

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The usual 50% limit on entertainment deductions applies. So, if the boat trip runs $1,000 in qualified expenses, you can write off $500.

When a company-owned facility is used primarily for the benefit of employees, it’s exempt from the usual entertainment facility rules. It can deduct depreciation attributable to business use as long as employees use the place more than 50% of the time.

Tip: Usually, the value of the benefit received by employees is a tax-free fringe benefit.