Did you know that you can use your company Christmas party as a tax write off (if you host it, not just attend).The IRS has very specific rules so it is important to do all of your research and properly follow their rules before you try to willy nilly use the party as a deduction on your taxes. However, there are a few ways to use the part as a marketing opportunity and a party to benefit your employees (both of which are tax deductible). Read on for a few tips to write off your company Christmas party.
Choose Your Guests Carefully
If you invite your employees plus their spouses, the party will be 100% deductible. That is because the party is solely for the benefit of your employees and families. However, if you invite clients or potential clients, only 50% of the costs of the party (or the costs directly associated with those attendees) are tax deductible. If you invite friends, 0% of the costs associated with their attendance is tax deductible. If you invite a mixed group, you can deduct 100% of the costs associated with your employees and 50% of the costs associated for clients and potential clients. Keep a detailed invite list and attendee list to track what you can deduct.
Do Business Before, During and After the Party
In order to write off the entertainment, you have to also discuss business. Use the event to do a product demonstration, a sale’s pitch or education regarding your business. The IRS considers these events similar to taking out a client to lunch. The only except to the doing business party is the holiday party – if you only invite your employees and spouses.
If you throw a very extensive party, you will not be able to write it off. There is a clause in the tax law that says the entertainment needs to be “ordinary and necessary”. That means that you can’t fly your employees out to Hawaii for a Christmas party just because. You can, however, host the typical Christmas party that involves going to a nearby restaurant to help your employees feel appreciated.
In order to properly use your company party as a tax write off, you have to document everything. That means who attended, what was discussed, how much was spent (including receipts), etc. Without the proper documentation, you cannot prove the deduction if you are audited. Keep all of your receipts. Make and keep an itinerary. If you launch a new product, record it. Take pictures or video at the event to help you keep track of attendees.