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Hike deduction for late-summer party

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in Small Business Tax,Small Business Tax Deduction Strategies

As summer winds down, you may decide to host an outdoor party at your home, including business clients and friends.

Strategy: Invite mostly clients. Depending on the situation, you may be able to write off a larger share of the home entertainment cost.

It’s especially important to include clients you’ve just met with.

Here’s the whole story: Normally, you can’t deduct the cost of entertaining business clients just for goodwill. But you can write off 50% of the cost of entertainment that directly precedes or follows a “substantial business discussion.” For instance, you qualify for this tax break if you meet with a client and then invite the client and his or her spouse to an evening get-together. (If the client is from out of town, it’s generally OK to host the gathering the day before the discussion or the next day.)

When you entertain both business clients and social guests, only the amount attributable to the clients is eligible for the deduction.

Example: Following a discussion with seven clients on a Friday afternoon, you decide that you will invite the entire group, including their spouses, to your home for a dinner party. With you and your spouse and two couples who are friends, the total crowd is 20, and 16 count as business attendees (including you and your spouse). If the party costs $2,500, you can deduct 50% of $2,000 (16/20 Î $2,500), or $1,000.

However, if you are an employee of your business, the party expenses are unreimbursed employee business expenses that must be treated as a miscellaneous itemized deduction item, subject to a deduction threshold of 2% of adjusted gross income (AGI).

Tip: A better approach may be to have your business reimburse you. The business can deduct 50% of the cost without regards to the 2%-of-AGI limit.

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