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Is Your Company Holiday Party Tax Deductible?

Company holiday parties are a ball, yes, but also a chunk of change. We have Jennifer Dunn from TaxJar here (part of our Square App Marketplace) to walk you through what’s tax deductible and what’s not when it comes to your holiday party. Remember, this post is for educational purposes only. For tax and accounting advice related to your specific business, consult with a professional.

Is your holiday party tax deductible? What if you invite clients, or potential clients? How do you make sure that you will be able to write this off as a tax deduction? Here’s the rundown:

Employees vs. Clients

If the party is for employees only, it’s likely the cost is fully deductible. However, if you invite customers (or prospective customers) to the party, it could be another story. It’s possible to deduct part of the cost attributable to those non-employees, but in order to do so, the party will have to be part of a substantial business activity. That means that the primary reason for having the event is for business (as opposed to entertainment). For example, having a semi annual meeting around the holidays with presentations would be considered a substantial business activity, whereas a five minute “we are awesome” speech during the middle of a DJ set would likely not. For more information, see IRS Publication 463.

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Documentation

In case you find yourself in the unfortunate situation of being audited, make you have the paperwork handy to back up why you took certain deductions related to your party. That means keeping good records of the expenses, attendees (whether employees, employees’ guests, or clients), and any business activities during the event.

Also, keep in mind the IRS may take a skeptical eye when it comes to what might be considered an extravagant expense. As such, make sure the expenses you plan to deduct are reasonable. Use common sense here. If you are a large company, thousands of dollars spent on a holiday soiree is probably appropriate. But if you’re a small operation and spend that much, it may raise some red flags. As a guideline, you’ll want to make sure that the amount spent is not a major portion of your expenses for your business during the year.