Now that the winter holidays are behind us, most small businesses are focused on their tax obligations for the previous year. Given 2022’s significant inflation and other financial challenges, business owners are looking for every tax break they can find. If you hosted a company party or two over the holidays, there’s good news: all or part of your party expenses may be tax deductible.
Here’s what you need to know about deducting holiday party expenses.
Staff parties
Staff parties are 100 percent tax deductible, as long as you meet the following three conditions:
- Benefit of employees: The party must be primarily for the benefit of your employees. They can invite significant others and family members, but you can’t open the party up to clients or customers and expect the same deduction. The invitees must be limited to employees and their families/significant others.
- Invitees: To enjoy the 100 percent tax deduction, you’ll need to invite all your employees, not just a selected group. In other words, you can’t host multiple parties per department or employee type—or exclude certain employees—if you want to deduct the cost.
- Reasonable expenses: The expenses have to be “reasonable,” proportionate to your business type and size. The IRS will look for “lavish” or “extravagant” expenses, but that differs depending on what kind of business you own. For example, if you run a retail business with ten employees, it is not reasonable to rent out Six Flags for a company party—but if you’re a major corporation, that might be appropriate.
Customer and non-employee parties
If you want to host a customer, vendor, or contractor appreciation party, or invite these people to your employee party, you can only deduct 50 percent of the cost of hosting them. For example, if 50 percent of your party guests are employees and their families, you can deduct 100 percent of those costs. Then you can deduct 50 percent of the costs for the remaining guests. If that sounds confusing, your bookkeeper and tax preparer can help you figure out the exact cost and deduction breakdown.
General public
If you’re planning on throwing a party for the general public, that’s typically fully deductible, since it’s a promotional or advertising expense. However, you may want to double-check with your tax professional before making any big plans.
How to deduct your parties
Documentation is the key to deducting your parties—after all, if you’re audited, you want a clear record of your expenses and what they were used for. Keep all of your holiday party receipts together, whether you have physical or digital copies, and make a note of what the expenses were used for.
You should also keep a list of everyone who was invited, especially if you’re inviting employees and contractors, vendors, and select potential customers. This will help your tax professional apply the right deductions for the party.
If you need bookkeeping and tax preparation assistance for your small business, reach out to MCG Solutions today.