Are Office Parties Deductible?

The first requirment for the party to be fully deductible is it must be for employees. All employee must be allowed to attend. A party for a special class of employees will likely run afoul of this requirement. The party must be only for employees and their immediate families in order to be 100% deductible. Once customers are invited the rules change.

A party for customers and prospects can only be deductible if the party serves a legitimate business purpose. This usually means business must be discussed at the party. Even if this requirement is met only 50% of the general costs may be deducted. if the party is a mix of employees and customers the expenses will have to be allocated.

Another limitation on parties is the expenses must not be for entertainment that is lavish or extravagant. These are nebulous terms and IRS publications don’t give much clarification. According to IRS publication 463 (Travel , entertainment, gift and car expenses)

“An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts.” Common sense should usually be your guide here. Extravagence at a company party for employees only could be viewed as compensation to employees.

The final point is to keep good records. Keep a guest list and check it twice . This will come in handy if the IRS questions if the party was for employees only.

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